With banks still not lending and Detroit's Big Three near collapse, the U.S. Federal Reserve took the unusual steps of lowering its
target for overnight interest rates by three quarters of one percent to
a historic low of 0.25% and added that it will let the rate float to
0%. The central bank said it needs to combat the deepening recession
and signaled it will keep rates "exceptionally low" for some time and
continue to expand its balance sheet to stabilize the economy.
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The
Federal Open Market Committee voted unanimously to reduce the target Fed funds rate for interbank lending from 1% to a range of zero to
0.25%, the lowest since the Fed started publishing the funds target in
1990. While a drop in rates was widely expected, economists were
surprised at the large cut and didn't expect the Fed to set a range.
"The
Committee anticipates that weak economic conditions are likely to
warrant exceptionally low levels of the federal funds rate for some
time," the Fed said in its
statement, adding it will "employ all available tools" to promote growth and maintain price stability.
The Fed also lowered the discount rate paid by commercial and investment banks for Fed loans by 0.75 percentage points to 0.5%.
In
announcing the cut, the FOMC made it clear that it still has means with
which to stimulate the economy and referred to the panoply of new
lending programs that allow it to pump money directly into financial
institutions.
"The Federal Reserve will employ all available
tools to promote the resumption of sustainable economic growth and to
preserve price stability," it said. Among those tools, it cited the
continuing purchase of agency debt and mortgage-backed securities and
the "potential benefits of purchasing longer-term Treasury securities."
-
Donna Block
