The Federal Reserve announced Tuesday that it would cut the Federal funds target rate by 75 basis points to 0.25%, going a step further than the consensus market expectation. The accompanying statement said labour market conditions have deteriorated and that consumer spending, business investment, and industrial production have all declined.
The Fed Funds target, the rate that banks use to lend to each other via the Fed, has never been below 1% before.
In the growth paragraph of the accompanying statement, the Fed's monetary policy committee said: "Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."
On price stability, the central bank said "inflationary pressures have diminished appreciably" and further moderation is expected in the coming quarters.
The Fed said it "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."
Going forward, the Fed said "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
The statement also discussed the prospects for unconventional monetary policy to stimulate the economy. Since early September, the Fed's balance sheet has grown over $1 trillion to more than $2 trillion in total.
"As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant," the statement said.
The Fed's Open Market Committee also said it was looking at the potential benefits of purchasing long-term Treasuries in an effort to influence interest rates favourably. In addition, the Fed said it will implement the Term Asset-Backed Securities Loan Facility to extend credit to households and small businesses.
Other unconventional means of monetary policy will also be considered.
In addition to cutting the overnight lending rate, the Fed opted to slash the discount rate 75 basis points at 0.50%.
The statement passed with all 10 members voting in favour of the action. Voting for the monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
Since September 2007, the Federal Reserve has cut the target interest rate by 500 basis points, from 5.25% to 0.25%.
By Patrick McGee and edited by Stephen Huebl
©CEP News Ltd. 2008