Fed cuts target for key rate to record low

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 on Tuesday said it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 percent.

The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow Jones industrial average rose about 210 points in late-afternoon trading.

The Fed's action and statement made clear that economic conditions have worsened since its last meeting in October.

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 $600 billion 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 country in more than 70 years.

The Fed on Tuesday 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 1 percent. For November, the funds rate had averaged 0.39 percent. 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 4 percent.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 percent. The lowest target rate before had been 1 percent, 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 percent in November, reflecting a record decline in the price of gasoline and other energy products.

Fed cuts interest rate to 1%

The Federal Reserve has slashed a key interest rate by half a percentage point as it seeks to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.

The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.

In a brief statement explaining Wednesday's action, the Fed said that the "intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit."

The central bank said that "downside risks to growth remain" holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.

Federal Reserve Chairman Ben Bernanke and his colleagues pledged that they would "monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Wall Street had staged its second biggest point surge ever on Tuesday with the Dow Jones industrial average climbing by 889 points in anticipation of the Fed's action. Trading was more subdued on Wednesday with the Dow actually slipping into negative territory immediately after the announcement, but surged up by about 200 points in late-afternoon trading.

Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed's last meeting of the year on Dec. 16.

But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction if needed next year should the country's economic troubles intensify.

David Jones, chief economist at DMJ Advisors, said the Fed's rate cut will be followed over the next week by similar action in other major countries as they grow more concerned that the recession that began in the United States is spreading to their regions.

But he said a section of the Fed's statement where it listed all the efforts taken so far to battle the slowdown was a signal the central bank believes it has done enough for now.

Other economists disagreed, saying the Fed clearly lowered its worries about inflation while raising concerns about economic growth.

Sung Won Sohn, an economist at the Smith School of Business at California State University, said he believed the Fed will make the "momentous decision" to move the funds rate to zero if events in coming months show such an action is needed to battle the global credit crisis.

In its statement, the Fed indicated it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.

While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

The Fed's action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

The central bank also announced that it was lowering its discount rate, the interest it charges to make direct loans to banks, by a half-point to 1.25 percent. This rate has become increasingly important as the central bank has dramatically increased direct loans to banks in an effort to break the grip of the credit crisis.

Bernanke pledged in a speech earlier this month that the Fed "will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity."

In addition to the rate cuts, the Fed has been moving to pump billions of dollars into the banking system to help unfreeze markets that seized up in dramatic fashion last month. The ensuing meltdown of financial markets caused the Bush administration to successfully lobby Congress to pass on Oct. 3 a $700 billion rescue package to make direct purchases of bank stock and buy up bad assets as a way of getting financial institutions to start lending again.

That money started flowing earlier this week with $125 billion going to nine of the nation's biggest banks. Other industries, including automakers and insurance companies, are in talks with the administration to get a share of the bailout funds.

And there is pressure from lawmakers to deploy some of the bailout resources to provide mortgage guarantees to encourage more banks to rework home loans to stem a record tide of foreclosures.