US Fed slashes interest rates to record low (Lead)

December 17th, 2008 - 3:46 am ICT by IANS  

Barack ObamaWashington, Dec 17 (DPA) The US Federal Reserve Tuesday slashed interest rates to an unprecedented “target range” of 0 to 0.25 percent - an historic low for the US and part of a dramatic effort to rescue the world’s largest economy from a deep recession.The drop of at least 0.75 percentage points in the federal funds rate from its current level of one percent was a unanimous decision by the US central bank’s governing committee board, which said the economy has continued to deteriorate over the last few months.

The Fed has never before created a range for its benchmark interest rate. Analysts said the choice not to give a hard target reflected its inability to dictate rates at a time where many banks have stopped lending altogether.

The US recession would require “exceptionally low levels of the federal funds rate for some time”, the Fed said in a statement, promising to use “all available tools” to stabilize the economy.

The central bank’s decision is part of a series of dramatic and unprecedented moves taken over the past year as the country’s financial crisis has led the wider economy on a downward spiral.

The last time rates were below one percent was in the 1950s and the latest cut brings the Fed’s options in the traditional monetary policy arena nearly to an end.

The Fed signalled it will expand its second policy tool - injecting cash into financial insitutions and other companies that are still threatened with collapse.

The availability of credit, outside of government options, has virtually dried up since September amid the financial turmoil and the Fed has doled out more than $2 trillion in assets to keep banks alive.

The Fed said it planned to keep its balance sheet at a “high level” and may boost other measures, including buying up mortgage-backed securities at the heart of the financial turmoil.

The Federal Open Market Committee - the bank’s decision-making body - originally planned a one-day meeting to discuss the rate cut, but extended its gathering to two days to consider additional moves.

President-elect Barack Obama earlier Tuesday said the Fed’s limited options meant other branches of government had to “step up” their efforts. He cited his promise of a major new fiscal stimulus package when he enters office in January.

“We are running out of the traditional ammunition which is used in a recession,” Obama said at a Chicago press conference announcing his choice for education secretary. He called the current climate the “toughest time economically since the Great Depression” of the 1930s.

The Fed meeting came as consumer prices plunged by the most on record in November, dropping 1.7 percent since October as a result of dropping energy and petrol prices, the US Labour Department said.

Tuesday’s Fed decision continued a dramatic series of rate cuts that began in September 2007.

The US economy has been in a recession since December of last year and economists are predicting a decline in output of as much as five percent in the fourth quarter of 2008. Nearly two million jobs have been lost in the year so far.

Fed Chairman Ben Bernanke indicated earlier this month that simple rate cuts were proving ineffective in the current climate. Banks hoping to stave off bankruptcy and maintain their cash reserves have largely stopped lending regardless of the Fed’s benchmark rate. The Fed needed to focus on boosting liquidity instead.

The central bank said it was also considering buying up long-term Treasury securities, the yields on which have fallen to record lows as investors seek a safe haven for their money. US stocks have plunged some 40 percent since the start of 2008.

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