Fed reduces benchmark rate to as low as zero

The Federal Reserve, urgently rewriting its playbook to fight a deepening recession, cut its benchmark interest rate to as low as zero Tuesday, a surprisingly strong step that should make it cheaper for Americans to borrow on credit cards and pay their mortgages.
Wells Fargo, Wachovia and U.S. Bancorp immediately lowered their prime lending rates from 4 percent to 3.25 percent, and other banks will probably follow suit. Economists cautioned, though, that people frightened by the economy and worried about their own jobs may not feel like taking on more debt.

The Fed's action was unprecedented in the central bank's 95-year history, and Wall Street embraced it. The Dow Jones industrials, which had been up about 120 points ahead of the Fed announcement, finished the day up nearly 360, a gain of more than 4 percent.

For the first time, the Fed created a target range for its funds rate, putting it at zero to 0.25 percent. That was a dramatic reduction from the previous rate, which was an already low 1 percent. The federal funds rate is the interest that banks charge each other for overnight loans.

The radical action underscores the breathtaking deterioration in the U.S. economy and the stability of the financial system this fall, and even since Fed policymakers last gathered in late October.

For years, cutting the funds rate had been the Fed's most potent weapon for snapping an economy out of trouble. But the recession, which economists say began a year ago, seems to be worsening despite all the steps taken so far.

The move "will go down in the annals of Fed history," declared Stephen Stanley, chief economist at RBS Greenwich Capital. "I nominate this one to be called the `Who Could Ask for Anything More?' statement. The Fed is throwing everything in its arsenal."

There was fresh evidence of the economic danger Tuesday before the Fed announcement. Housing starts for November plunged by almost 19 percent, the most in a quarter-century.

And consumer prices fell by a record 1.7 percent in November, the second straight monthly decline, raising fears the nation is in a dangerous bout of deflation -- a widespread, prolonged decline in prices that would take a bite out of personal income and corporate profits and do further damage to the already pummeled housing market. The Fed's lower rates could help prevent deflation from taking hold.

At the heart of the economic crisis are credit and financial problems that have made worried banks reluctant to lend to customers -- regardless of how cheap money has become.

At the same time, fearful Americans, watching jobs evaporate and their investments crumble, have sharply cut back on spending, including on big-ticket purchases such as homes and cars that typically require financing.

The Fed hopes lower borrowing costs will entice people and businesses to spend more, helping the economy. Citing "weak economic conditions," the Fed said it expected to keep its funds rate at "exceptionally low levels ... for some time."

The bold move on rates surprised not just Wall Street investors but also economists, most of whom were predicting the Fed would cut its funds rate in half, to 0.5 percent.

With the Fed's key rate sinking to near zero, the central bank moved into uncharted territory. Still, Fed Chairman Ben Bernanke and his colleagues insisted the central bank isn't running out of ammunition to fight the crisis.

"The Fed will employ all available tools to promote the resumption of sustainable economic growth," the Fed said.

It said, for example, that it is weighing the benefits of buying longer-term Treasury securities on the open market in substantial quantities. Doing so might lower rates on those securities and help energize the economy.

The Fed also cited a program it announced late last month to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac. That has already helped push mortgage rates down.

And early next year the Fed, in another previously announced program, plans to roll out a $200 billion program to boost the availability of auto loans, student loans, credit card loans and other lending to consumers.

The Fed's statement provided a far more gloomy assessment of the economy than the central bank made after its October meeting, citing deterioration in the labor market, consumer spending, business investment and industrial production.

"It is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future," said Ian Shepherdson, chief economist at High Frequency Economics.

Even Goldman Sachs Group, reported a loss Tuesday for the first time since it went public in 1999 -- $2.3 billion for the quarter. Investors bought up stock in the company anyway.

And rates on 30-year Treasury bonds have dipped to a record low as investors look for a safe place to park their money. Yields on shorter-term Treasury bills even dipped into negative territory for a time last week.

Since the start of the recession, the economy has shed nearly 2 million jobs. Analysts predict 3 million more will be lost between now and the spring of 2010. The recession is shaping up to be the longest since the Great Depression.

President-elect Barack Obama is pushing an economic recovery plan that includes spending on big public works projects to create jobs, in addition to an economic stimulus package aimed at getting people to spend more money.

Obama met said Tuesday other branches of government should to "step up" because the Fed is "running out of the traditional ammunition" in the form of rate reductions.

For consumers, the Fed move essentially means money is now on sale. Experts predict mortgage rates will fall to 5 percent or lower and home equity loans will get cheaper. The result could be billions of additional dollars in Americans' pockets.

Even for people who have been laid off, credit card defaults will be less likely "because interest rates are at massively historical lows," said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

Still, some economists say there are two problems that lower rates don't address: the reluctance of people worried about their jobs to take on more debt, even at low rates, and the unwillingness of banks to lend to some people who do want to borrow.

"When you think about someone giving you a loan, it's not just the rate, it's lenders' expectations of your ability to repay that loan," said John Silvia, chief economist at Wachovia. "This is not the environment to go speculating on making loans to people who may be unemployed in two or three weeks."

And even though gas prices have dropped and inflation has ceased to be a worry, "consumers' behavior has changed," said Scott Anderson, senior economist at Wells Fargo. "People aren't spending that windfall, they're saving it."

fed cut 50 more basis point

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

Fed leads global coordinated rate cut, eases by half point

WASHINGTON (Reuters) - The U.S. Federal Reserve led a coordinated round of global official rate cuts on Wednesday, easing by a half percentage-point, as did the European Central Bank, Bank of England and Swiss, Canadian and Swedish central banks. In an attempt to stem unprecedented global market turmoil, the Fed cut its key federal funds lending rate by half a percentage point to 1.5 percent and also lowered its discount rate by the same amount to 1.75 percent.


The ECB also cut by a half-point to 3.75 percent as did the Bank of England, taking its rate to 4.5 percent.

China also joined the effort, cutting its key rate 27 basis points.

The Bank of Japan, with rates at just 0.5 percent, did not ease but the Fed said the BOJ expressed its strong support for the coordinated policy action.

"Incoming economic data suggests that the pace of economic activity has slowed markedly in recent months," the Fed said in a statement.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed said that while inflation has been high, recent declines in energy and other commodity prices had tempered inflation risks.

It said the vote to cut U.S. rates was unanimous and that inflation expectations appeared to be diminishing which could help support price stability.

"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said.

Fed cut rates

The Federal Reserve, European
Central Bank and four other central banks announced cut in interest
rates in an unprecedented, emergency coordinated bid to ease the
economic effects of the financial crisis. The Fed cut its benchmark
rate by a half point to 1.5%.

Fed cuts interest rates to lowest level in 4 years to prop up economy on edge of recession

Scrambling to shore up the faltering economy, the Federal Reserve cut interest rates to the lowest point in nearly four years Wednesday as the nation teetered on the edge of recession.




Wall Street rallied at first but then pulled back, concerned that the reduction might be the last for a while.

In fact, the Fed's trim was smaller than those of recent months amid indications the central bank might pause to see if months of powerful rate-cutting medicine and billions of dollars in stimulus checks will be enough to lift the country out of its slump.

Chairman Ben Bernanke led a divided Fed, in an 8-2 vote, in slicing its key rate by one-quarter percentage point to 2 percent.





In turn, the prime lending rate for millions of consumers and businesses fell by a corresponding amount, to 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates are the lowest since late 2004.

The Federal Reserve, which has been dropping rates since last September, turned much more forceful early this year when housing, credit and financial problems worsened. Rate reductions in January and March alone marked the most aggressive intervention in a quarter-century in an effort to re-energize consumers and businesses.

Bear Stearns Rescue Backed Amid Concerns

Federal Reserve Chairman Ben Bernanke and the Bush administration on Thursday defended the decision to rescue Bear Stearns amid questions by lawmakers about why the government was helping Wall Street investment houses but not people on Main Street.
Bernanke and Treasury Department Undersecretary Robert Steel said that the consequences to the U.S. economy and financial system would have been far more serious had the government allowed the nation's fifth largest investment house to go bankrupt.
The panel conducted a five-hour hearing as lawmakers sought to understand the decisions made during the hectic weekend of March 14-15 after Bear Stearns informed the Fed that it was on the verge of having to file for bankruptcy protection because nervous creditors were demanding to be repaid.

The investment house was purchased by JP Morgan Chase & Co. with assistance from the Fed in the form of a loan backed by $30 billion of Bear Stearns assets. JP Morgan has agreed to absorb the first $1 billion of losses if the value of the assets declines, but taxpayers are at risk for the remaining $29 billion.

Bear Stearns, with a stock price around $150 per share a year ago, was sold for $10 a share, becoming the biggest victim of a severe credit crisis that hit financial markets in August.

That crisis, which was triggered by a prolonged housing slump and cascading mortgage defaults, has made it harder for consumers and businesses to get loans and helped to push the country to the brink of a recession.

Fed Cuts Funds Rate to 3-Year Low -- Markets react by volatile trading

After the FED cuts the Rate to 3-year low, Market goes down a bit sharply, since it was expecting a cut of 100 basis points instead of 75 basis point. But recovers back again.. Market at 12:00AM IST
Dow 12,186.93 +214.68 +1.79%
Nasdaq 2,229.29 +52.28 +2.40%
S&P 500 1,301.87 +25.27 +1.98%

Fed Slashes Rates by Three-Quarter Points-

Fed Slashes Rates by Three-Quarter Points
With recession fears growing, the Federal Reserve slashed the federal funds rate by three-quarters of a point. Most investors expected a full-point reduction. Today’s cut comes on the heels of the Bear Stearns bailout and U.S. Treasury Secretary Henry Paulson saying the U.S. economy is in "sharp decline."

The Federal Reserve on Tuesday slashed a key interest rate by three-fourths of a percentage point, moving aggressively to contain a credit crisis threatening to push the country into a severe recession.
The latest action brought the federal funds rate -- the interest that banks charge each other -- down to 2.25 percent, the lowest point since late 2004. It marked the second back-to-back cuts of three-fourths of a percentage point.

Fed Chairman Ben Bernanke and his colleages have now cut the funds rate six times since last September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.

In Jacksonville, Fla., Tuesday, President Bush said the government will take further action -- if necessary -- to help the sagging economy.