Fed Slashes Official Interest Rates, Targets Zero to 0.25%

U.S. Federal Reserve Officials have a message for the American public: Borrow! Spend! That message doesn’t get much clearer, after the Federal Open Market Committee meeting concluded Tuesday afternoon with the announcement it had unanimously decided to lower its target federal funds rate — the rate banks charge each other to lend funds — 75 basis points to a range of zero to 0.25 percent from the 1 percent the target rate had been holding at since October. The FOMC — in a rather remarkable statement, insofar as Fed-speak goes — said the rate is likely to hold at an exceptionally low level “for some time” and that the Federal Reserve will “employ all available tools” to promote economic growth and preserve price stability. The central bank backed its decision with a statement saying “inflationary pressures have diminished appreciably” and that, considering “the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.” In recent weeks, the predictions tended to land on one of two actions: Economists said the Fed would either cut its rate by 50 basis points to 0.5 percent or by at least 75 basis points to 0.25 percent or less, bringing the rate down to the lowest mark recorded since 1954, according to a Yahoo! News bulletin. What would mark the last in a handful of rate cuts in 2008, economists argue, can do nothing to turn around the economy if all the other reductions have not helped. “It is not so much going to give the economy a big push forward,” Stuart Hoffman, chief economist at PNC Financial Services Group, told Yahoo!. “It’s more a case of trying to help the economy from being pushed further backward by all these negative events.” The Federal funds rate has hemorrhaged in the past year. In September 2007, the Fed cut the target for the rate 50 basis points to 4.75 percent — the first cut in four years. It has been bleeding since, in small 50 basis point- and slightly larger 75 basis point-increments. Some hesitation came out of the FOMC in June 2008, as worries that the rate — then at 2 percent — would fall much further, triggering inflation. October proved to be another month of bloodletting, with two swift 50 basis point reductions, bringing the rate down to 1 percent, where it had lingered through November. “The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth,” Fed chairman Ben Bernanke said in October. The argument remains that the Fed is out of tricks, as a long year of rate cuts has done little to turn the economy around and printing new money may be the only remaining option to pump capital into the system, a Fed practice called “quantitative easing,” or the gentle easing of larger quantities of money supply into the economy. (At least, that’s the theory: in practice, critics say quantitative easing means flooding the market with money in the hopes that at least some of it isn’t hoarded.) But with rates having eased down effectively to zero percent, money is cheaper than it’s ever been. Whether free or at a minuscule premium, the supply of money seems to have become a moot point in stimulating lending and getting the economy on its feet. And, of course, there is still the question of what the rate cut really means: the effective federal funds rate has already been at or near zero. Some argue the continued cuts will reignite inflationary pressures, while others posit that cutting rates all the way to zero will do little to stimulate an economy that is collapsing along with housing — were that to be the case, we could be staring at a dreaded Japanese-style “lost decade” all our own. Write to Diana Golobay at [email protected].