Nov. 24 (Bloomberg) -- The Federal Reserve may cut its target interest rate to zero percent in January and keep it there through 2009 to counter the threat of deflation, Macroeconomic Advisers LLC said.

``The economy is likely to decline at a 4 percent rate this quarter and at around 3 percent next quarter,'' with a ``sluggish rebound over the remainder of 2009,'' Laurence Meyer, a former Fed governor, and Brian Sack, a former staff member of the Fed's Monetary Affairs Division, wrote in a note to clients. ``Inflation is likely to fall below 1 percent in 2010 and still be declining, presenting a serious risk of deflation.''

Macroeconomic Advisers joins JPMorgan Chase & Co. and HSBC Securities USA Inc. economists in predicting the target rate will drop to zero. Fed policy makers marked down their forecasts last month for growth and inflation while cutting the benchmark rate to 1 percent to avert the worst economic slump since World War II.

The Fed is also likely to consider a number of unconventional policy actions, including purchasing private assets, according to St. Louis-based Macroeconomic Advisers.

``The Fed will most likely begin by buying private assets, and will then move to buying longer-term Treasuries if necessary, and then to using its communications to manage expectations about the future course of policy,'' the note said.

The Fed has reduced its benchmark rate by 4.25 percentage points since September 2007, to 1 percent, and rescued Bear Stearns Cos. and American International Group Inc. from failure with emergency loans.

To contact the reporter on this story: Steve Matthews at smatthews@bloomberg.net;

Last Updated: November 24, 2008 17:51 EST