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TMCNet: Federal Reserve sets key interest rate at all-time low

[December 17, 2008]

Federal Reserve sets key interest rate at all-time low

(Sun Sentinel, Fort Lauderdale, FL Via Acquire Media NewsEdge) Dec. 17--The Federal Reserve on Tuesday slashed 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 Fed lowered the federal funds rate to a target range of 0 to 0.25 percent.

"The Fed is done moving the interest rate lever," said Greg McBride, a senior financial analyst at Bankrate.com in North Palm Beach. "They can't take it below zero."

The biggest beneficiaries of Tuesday's rate cut were on Wall Street. The Dow Jones industrial average shot up 359.61 points, or 4.2 percent, to close at 8,924.14. The Dow is now more than 18 percent higher than its 52-week low last Nov. 20.

The losers are savers, who will continue to see miserably low interest rates on certificates of deposit. Consumers may not see big reductions in their borrowing costs.

After seven Fed rate cuts this year, some credit-card interest rates may be hitting a bottom or floor, below which the interest rates won't fall by terms of the card agreement.

Adjustable-rate mortgages also have set amounts the interest rates can decline in any one year. Adjustables may have already fallen as far as possible this year. And lenders increasingly are cutting off or reducing home equity lines of credit, which would offset the benefit of lower rates.

Rather than bailing out consumers, the Fed's goal is to revive the larger U.S. economy. The central bank maneuvered carefully Tuesday so as not to appear to be running out of options.

"I think you open up every valve all the way to do what you can to get the economy out of this slump," University of Central Florida economist Sean Snaith said. "They effectively opened the door to go to zero without stating that as their target."

The new federal funds rate, which is the interest banks charge to lend to one another, is down from the 1 percent target rate in effect since the previous meeting in October.

The Fed's action and subsequent statement from its Open Market Committee made clear that economic conditions have worsened since its last meeting.

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. The Fed statement repeated the central bank's intention to purchase mortgage-backed securities, for example. And it indicated it is looking into buying longer-term Treasury securities, to shore up the market and rates.

New economic data released Tuesday showed the Fed's rate cutting isn't sparking inflation. The consumer price index fell 1.7 percent in November, the steepest monthly decline since the federal government started tracking prices in 1947.

Last month, the Fed 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, in turn, has brought down mortgage rates "and is likely to keep them there for an extended period, which is critically important to getting buyers interested [in housing]," McBride said. The average interest rate on a 30-year, fixed-rate mortgage last week was 5.47 percent, down nearly a full point from the October average, according to Freddie Mac.

The Fed on Tuesday stressed 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.

By day's end, major banks and lenders responded by cutting their prime consumer lending rate to 3.25 percent, and it could fall to as low as 3 percent, Snaith said.

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 previously seen only once in the past 50 years.

Information from the Associated Press was used to supplement this report.

To see more of the Sun Sentinel or to subscribe to the newspaper, go to http://www.sun-sentinel.com.

Copyright (c) 2008, Sun Sentinel, Fort Lauderdale, Fla.
Distributed by McClatchy-Tribune Information Services.
For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

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