WASHINGTON – The Federal Reserve is expected to slash its benchmark lending rate to record lows Tuesday. In theory, that will drive down the cost of borrowing for businesses and consumers, but in practice that isn’t happening, as banks are still charging consumers more than double the rate they usually offer their best customers.

When the Fed’s rate-setting Federal Open Market Committee wraps up its two-day meeting, it’s expected to make another half-point cut to the federal funds rate, an overnight rate that banks charge each other. That rate now stands at 1 percent, equaling the lowest it’s been since the Fed began targeting this rate.

The Fed could play it cautious and knock it back just a quarter-point, leaving room for more reductions, or it could swing for the fences and slash the rate by three-quarters of a point. That would bring the rate so low it would amount to free money when banks borrow from each other to meet reserve requirements.

“They’re pulling out all the stops,” said David Wyss, chief economist for the rating agency Standard & Poor’s in New York.

As long as the Fed cuts at least a quarter-point, any of the potential moves will surpass the all-time low – set during the Korean War era – of 0.8 percent. The Fed back then didn’t target the overnight lending rate, which today heavily influences the prime rate – what banks charge their best customers for loans.

Usually, a low federal funds rate is good news for consumers, since car loans, student loans and credit card rates are influenced by the prime rate, which is generally 2 percentage points higher than the fed funds rate.

However, amid the global financial crisis, which has left banks weak and with little appetite to lend, interest rates for car loans are more than double the prime rate, which stood at 3 percent Monday. The national average rate for a 48-month new-car loan stood Monday at 6.8 percent; the average rate was 7.07 percent for a 36-month used-car loan, according to the Web site Bankrate.com.

What those numbers mean for consumers is this: Banks are willing to lend only at a premium, even after the Bush administration’s $700 billion Wall Street rescue plan directed billions to banks in a bid to spark the economy through new lending. That means the plan isn’t working.

“The ones that are in good shape, they don’t want to take the risk (in lending to consumers). This money isn’t flowing through anywhere. It isn’t flowing through to the consumer,” said William Suplee IV, a certified financial planner and the president of Structured Asset Management in Paoli, Pa. “Everybody has a bunker mentality.”

Against this backdrop, the low federal funds rate and the low prime rate advertised by banks amount to little more than window-dressing. The U.S. economy faces a recession based on a housing slump of historic proportions and topped by a virtual freeze in lending of all sorts. That environment doesn’t encourage lenders to take chances.

In another sign of how today’s financial world is askew, a falling federal funds rate and falling prime rate usually signal bad news for the millions of Americans who put their savings into certificates of deposit. Usually, these falling rates lower the interest that banks pay on savings accounts and CDs. But today, banks and other financial institutions are hoarding money and building reserves to signal strong balance sheets.

For consumers, this means that many institutions are offering higher-than-expected rates to those consumers who are willing to park their money in CDs for anywhere from three months to five years.

The national average rate for a one-year CD stood at 3.22 percent, according to Bankrate.com, while the national average for a six-month CD was 2.75 percent Monday.

Those rates are hardly stellar, but they beat the yield on many short-term Treasury bonds and bills. Twice in recent months the rates on short-term treasuries have gone negative, meaning that nervous investors were willing to pay, versus be paid, to hold an instrument that’s considered the safest of investments.

“Everything that’s safe is yielding nothing. … You might as well stuff your dollars under the mattress. There are no safe, easy returns anymore,” Wyss said, pointing to an upside in the slim profits from CDs and treasuries. “Not losing money seems to be pretty good right now.”