By Scott Lanman and Craig Torres
Dec. 16 (Bloomberg) -- The Federal Reserve cut the main
U.S. interest rate to "a target range" of between zero and
0.25 percent and said it will do whatever is necessary to ease
the longest recession in a quarter-century.
"The Federal Reserve will employ all available tools to
promote the resumption of sustainable economic growth and to
preserve price stability," the Federal Open Market Committee
said today in a statement in Washington. "The committee
anticipates that weak economic conditions are likely to warrant
exceptionally low levels of the federal funds rate for some
time."
Nine rate cuts in the past 14 months and $1.4-trillion in
emergency lending have failed to reverse the economic downturn.
Chairman Ben S. Bernanke said this month the central bank could
expand its toolkit and try to unfreeze credit by buying Treasury
securities and other assets.
"The focus of the committee's policy going forward will be
to support the functioning of financial markets and stimulate
the economy through open market operations and other measures
that sustain the size of the Federal Reserve's balance sheet at
a high level," the FOMC said.
The statement noted that the Fed has already announced it
will purchase "large quantities" of agency debt and mortgage-
backed securities, and said the Fed stands "ready to expand"
these purchases "as conditions warrant." The central bank
continues to weigh "the potential benefits of purchasing
longer-term Treasury securities."
"The Federal Reserve will continue to consider ways of
using its balance sheet to further support credit markets and
economic activity," the statement said.
The deepening economic slump pushed unemployment to 6.7
percent last month, the highest level since 1993, while builders
broke ground on the fewest new homes since record-keeping began
in 1947. Deflation is also emerging as a risk: consumer prices
fell the most on record in November, the Labor Department said
earlier today.
Discount Rate
The vote was unanimous. In a related move, the Fed lowered
the rate on direct loans to banks and securities dealers to 0.5
percent.
The Fed twice pared the federal funds rate, or overnight
lending rate, to 1 percent since adopting it as the main tool of
monetary policy in the late 1980s. The 1 percent rate held from
June 2003 to June 2004. The Fed staged a half-point reduction to
1 percent on Oct. 29.
The Bank of Japan has been the only major central bank in
modern times to mix a policy of steep rate reductions with
quantitative easing, or the strategy of injecting more reserves
into the banking system than needed to keep the target interest
rate at zero.
Extra Cash
Japan's central bank kept its main rate at zero from 2001
to 2006 while flooding the banking system with extra cash to
encourage lending, spur growth and overcome deflation. The
abundant funds failed to prompt lending by commercial banks,
which expanded their reserves at the central bank almost nine
times by early 2004.
Bernanke, acting with New York Fed President Timothy
Geithner, has set up emergency loan programs aimed at averting a
collapse of the nation's credit markets. Geithner is President-
elect Barack Obama's pick for Treasury secretary and didn't
attend today's meeting.
The Fed has enlarged bank reserves, supported issuance of
commercial paper and provided liquidity to government bond
dealers. It is also swapping dollars with the European Central
Bank and its other counterparts to supply banks in other
countries.
Swelled Balance Sheet
The moves have swelled the Fed's balance sheet to $2.26
trillion from $868 billion in July 2007. That's in addition to
the $700 billion Troubled Asset Relief Program, which the U.S.
Treasury has used since October to channel about $335 billion of
capital injections into banks and other financial companies.
Still, the economy has crumbled, with employers cutting
533,000 jobs from payrolls in November for a total loss this
year of 1.9 million, which more than erases the 2007 gain of 1.1
million.
Credit remains scarce in many markets and major financial
institutions worldwide continue to report losses and writedowns
totaling $994 billion.
Macroeconomic Advisers LLC, a St. Louis-based consultant,
says the economy is probably shrinking at a 6.5 percent annual
pace this quarter, which would be the biggest drop since 1980.
The firm forecasts a 4.2 percent annual contraction rate in
the first quarter, returning to no growth in the second quarter
and a 2.3 percent expansion rate in the second half of 2009.
'Very Weak'
"The economy is very weak," former Richmond Fed President
Al Broaddus said in an interview with Bloomberg Television
before the decision. Fed officials are trying to do "whatever
they can to help the economy find a bottom and begin at some
point in the not-too-distant future to move out of this,"
Broaddus said.
Early this month, as a panel of leading U.S. economists
declared the recession began in December 2007, Bernanke signaled
he was ready to dig deeper into the central bank's toolkit. He
said he may use less conventional policies, such as buying
Treasury securities, because his room to lower the main U.S.
rate from the current 1 percent level was "obviously limited."
Obama said at a press conference today that he won't
"second-guess" the Fed, adding that with "traditional
ammunition" running low, "it is critical that the other
branches of government step up." Obama has called for a
stimulus package including spending to rebuild U.S. roads,
bridges and other infrastructure.
The federal funds target rate has weakened as a monetary
policy tool because the Fed's flood of funds has caused the
average daily rate to trade below the policy goal every day
since Oct. 10.
The gap between the target and the effective rate, or
average daily market rate, has averaged about a half point since
Sept. 12. The gap averaged just above zero from the start of
this year through Sept. 2.
Lower Rates
The central bank is trying to lower mortgage rates by
purchasing up to $100 billion of debt issued by housing-finance
providers Fannie Mae and Freddie Mac and $500 billion of
mortgage-backed securities guaranteed by the companies.
The Fed's counterparts around the world have staged their
own interest-rate cuts. The ECB has lowered its main rate to 2.5
percent this month from 4.25 percent in July, while the Bank of
England reduced its rate to 2 percent this month from 5.75
percent in July.
ECB President Jean-Claude Trichet said yesterday there's a
limit to how far the bank can cut interest rates and signaled
policy makers may pause in January. "Do we have a feeling there
is a limit to the decrease in rates? At this stage certainly
yes," Trichet told journalists in Frankfurt.
While the Fed can't push interest rates below zero, "the
second arrow in the Federal Reserve's quiver -- the provision of
liquidity -- remains effective," Bernanke said in a Dec. 1
speech.
For Related News:
Stories on the Fed: NI FED <GO>
Top finance stories: TOP FIN <GO>
--With reporting by Steve Matthews in Atlanta and Kathleen Hays
in New York. Editors: James Tyson, Daniel Moss
To contact the reporter on this story:
Scott Lanman in Washington at +1-202-624-1934 or
slanman@bloomberg.net;
Craig Torres in Washington at +202-654-1220 or
ctorres3@bloomberg.net;
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