Fed Cuts Deep


The three-quarter-point cut brings the federal funds rate to its lowest point ever, as Bernanke takes dramatic action to stem a further slide for the economy

By the Associated Press

The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

The central bank says it reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25%. That is down from the 1% target rate in effect since the last meeting in October.

Federal Reserve Chairman Ben Bernanke and his colleagues also pledged to use "all available tools" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

The Fed also made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

The Fed's decision is expected to be quickly matched by a reduction in banks' prime lending rate, the benchmark rate for millions of business and consumer loans. Before the Fed announcement, the prime rate stood at 4%.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25%. The lowest target rate before had been 1%, a level seen only once before in the past half-century.

Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The announcement on the deployment of unconventional methods had been expected given that Bernanke and other Fed officials have sought in recent comments to let financial markets know that the central bank will not be out of ammunition to battle the economic downturn even with the funds rate at such low levels.

In its statement Tuesday, the Fed said that since its last meeting in late October, "labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight."

The central bank acknowledged that it had room to battle the economic weakness because inflation pressures have "diminished appreciably" as the price of energy and other commodities has fallen sharply.

The Fed action came only hours after the government announced that consumer prices dropped by a record amount of 1.7% in November, reflecting a record decline in the price of gasoline and other energy products.


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