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 eyes record low interest rates to battle deflation

All eyes will be on the feds to see if they lower interest rates today. But at this stage that we're in, will it really help? With all the turmoil going on in financial news right now, it's hard for me to say.

Many analysts are anticipating a half-point cut, which still would be an all-time low for the rate.

But the Fed's low rates have not yet filtered into many consumer and business loans, and the central bank is likely to expand its arsenal of extraordinary actions to break the global credit crunch and avert a crippling deflationary spiral, say analysts.

"The Fed basically lost control of the rate after the Lehman Brothers failure on September 15," said Jeremy Siegel, a University of Pennsylvania economist and adviser to Rittenhouse Asset Management.

"With the effective real market rate now at zero, what difference does a cut make?" said John Mauldin, president of Millennium Wave Advisors.

"I hope they do the right thing and go ahead and cut at least 75 basis points, if not more. That would stop the speculation and let them move on to quantitative easing and other allied policies."