Fed slashes US interest rates to under 0.25%
Wednesday, 17 December 2008 08:16
The Federal Reserve last night cut US interest rates to the bone leaving them at "a target range for the federal funds rate of 0 to 0.25 per cent".
In its statement, the Fed also warned that "the outlook for economic activity has weakened further" and further measures would be considered to aid the US economy.
The move leaves the Fed with few options should the economic outlook worsen simply because it cannot lower interest rates any further.
It predicted that rates would stay at current levels "for some time".
The Fed added it was considering ways it could spend money on supporting the economy and credit markets.
Meanwhile it is already injecting billions of dollars into the banking system, as well as buying debt based on home loans.
The Federal Reserve stressed that it was already planning to buy large quantities of additional debt based on mortgages and is considering whether it would be a good idea to buy long-term US government bonds.
The strategy of a central bank buying government bonds is much the same as the so-called "quantitative easing" carried out by the Japanese government when it was fighting deflation in the late 1990s and early 2000s.
Deflation tends to become a greater risk as interest rates approach zero because consumers postpone making any large purchases as they believe prices are going to fall, stifling economic activity even further.
The rate cut is the last step in a serious of cuts which have seen interest rates in the US fall somewhat dramatically from 5.25 per cent in September 2007.
It is the lowest interest rates in the US have been since records began in 1954.
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