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Business

Fed slashes US interest rate to near zero

Video by Louis MASSIE

Latest update : 2008-12-17

In its latest effort to battle recession, the US Federal Reserve slashed its key interest rate from 1.0 percent to between zero and 0.25 percent. It's the first time the key rate has been so low since 1954, when records were first maintained.

AFP - The Federal Reserve slashed its base lending rate Tuesday from 1.0 percent to virtually zero, saying its target federal funds rate would be a range of zero to 0.25 percent.
   
The unprecedented low rate announced by the Federal Open Market Committee is aimed at fighting off deflation and a crippling global credit crunch.
   
Additionally, the Fed said it would take other steps to stimulate lending and economic activity, including large purchases of mortgage securities to help unblock credit.
   
"Since the committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the Fed said after its unanimous decision.
   
"Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further."
   
The central bank headed by Ben Bernanke said it would move "to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level."
   
The Fed said it would "purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets."
   
The FOMC "is also evaluating the potential benefits of purchasing longer-term Treasury securities" in an effort to bring down other lending rates to stimulate credit and economic growth.
   
"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the statement said.
   
As policymakers deliberated, economic data showed the grim state of the world's biggest economy.
   
US housing starts tumbled 18.9 percent in November from a month earlier to a new record low, down 47 percent from last year's level, in a sign that the troubled housing market has not yet hit bottom.
   
US consumer prices plunged a record 1.7 percent in November, the second consecutive record-breaking decrease.
   
The sharp fall in prices essentially wiped out any inflation threat and stoked fears of deflation, seen as a more crippling phenomenon. Year-over-year inflation fell to just 1.1 percent from 3.7 percent a month ago.
   
The Fed's actions come amid growing expectation of falling prices that could set off a deflationary spiral hard to counter.
   
The extraordinary actions on the bond market underscore the conundrum for the central bank.
   
Yields on some short-term Treasury bills became negative for the first time -- meaning investors are willing to give up a bit of their capital for the safety of US government debt in view of a deflation threat.
   
At the same time, the Treasury in the past week issued 30 billion dollars in bills at a rate of zero percent, highlighting the same fears.
   
The effective federal funds rate on the futures market has fallen near zero as well -- as low as 0.0625 percent -- despite the Fed target of 1.0 percent, because of the exceptional amounts of liquidity being pumped into the system.

Date created : 2008-12-16

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