Fed cuts key rate target to record low

The US Federal Reserve cuts its target for a key interest rate to the lowest level on record to combat the recession.

Michael Sollitto watches the Federal Reserve's interest rate decision as he works on the floor of the New York Stock Exchange.

WASHINGTON // 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 said yesterday it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 per cent. That is down from the one per cent target rate in effect since the last meeting in October.

Many analysts had expected the Fed to make a smaller cut to 0.5 per cent. The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow Jones industrial average rose more than 250 points in late-afternoon trading. The Fed's action and statement made clear that economic conditions have worsened since its last meeting in October. The Federal Reserve chairman Ben Bernanke and his colleagues said they will use unconventional methods to try to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

For example, the Fed last month said it planned to purchase up to US$600 billion (Dh2.2 trillion) in direct debt and mortgage-backed securities issued by big financial players including Fannie Mae and Freddie Mac in an effort to boost the availability of mortgage loans. That move was one of a series the central bank has taken to increase its loans by hundreds of billions of dollars as a way to deal with the worst financial crisis to hit the US in more than 70 years.

Yesterday 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. Even before the announcement of a lower target, the funds rate has been trading well below the old target of one per cent.

For November, the funds rate had averaged 0.39 per cent. Analysts said it was likely to fall further with the Fed setting the new target as low as zero. 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 four per cent. The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 per cent. The lowest target rate before had been one per cent, a level seen only once before in the past half-century.

*AP