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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Fed Cuts Key Interest Rate to Historic Low

The Federal Reserve just announced it is cutting the federal funds to a target range of zero to .25 percent, an unprecedented move as the government scrambles to repair the economy.

The rate at which banks loan to each other is now the lowest U.S. rate on record.

In its policy statement, the Fed said its open market committee, "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

The vote by the committee was unanimous. Wall Street and many economists had been expecting a .5 percent cut.

The Fed's move marks the 10th time it has cut rates in more than a year. But as the Post's Neil Irwin reported this morning: "Rate cuts, however, are not having the same impact that they normally have. Given the meltdown in world credit markets, no matter how low the rate goes, lenders are not passing the cuts to their customers."

The Dow Jones industrial average, which has been up all day, is up 2.5 percent, or more than 200 points, after the news was released.

Ian Shepherdson, chief U.S. economist, for High Frequency Economists, told clients in note that the Fed's move "is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues."

-- Michael S. Rosenwald

By Michael S. Rosenwald  |  December 16, 2008; 2:23 PM ET
Categories:  The Ticker  
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Comments

Banks are. in fact, passing along lower rates to their borrowers. The reason stock markets rise when fed funds rate drop is because when the prime rate drops, the costs of business borrowing drops and the bottom line of businesses rise.

But bankers are reluctant to lend additional funds or fund new companies because they do not want to assume new risks unless they can get high rates of return.

Also, of course, as the Treasury prints new money, the real value of the dollar drops and high interest on long-term loans protects lenders against future inflation.

Posted by: loyalsyst | December 16, 2008 2:50 PM | Report abuse

The Fed's gun is now empty. What next? No one is chasing yield. The effective rate was already zero. Capital preservation is the name of the game. Layoffs are contuinuing at an accelerating rate, and for those who would risk buying a non-liquid asset right now, mortgage rates aren't the issue while home prices are still declining under an 11 month inventory.

The only reason they fired all barrels is that no one is telling us the truth about how bad things are likely to get.

Posted by: LenB | December 16, 2008 3:06 PM | Report abuse

"Also, of course, as the Treasury prints new money, the real value of the dollar drops and high interest...."

Actually, this time the fed is not printing more money, we're borrowing it. We're only in trouble in the future if China, Japan or Europe decide they want their money back.

Posted by: cmecyclist | December 16, 2008 3:11 PM | Report abuse

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