Federal Reserve Slashes Federal Funds Rate to Nearly Zero

The Federal Reserve announced today that they cut the federal funds rate to a range of 0 to .25%, down from the previous interest rate of 1%. The rate cut brings the key interest rate down to a historic low. Citing their concern over the worsening job market, and the decrease in consumer spending, business investment, and industrial production, this is the Fed's latest attempt at stimulating the economy with a rate cut.

The Fed stated that they expect the federal funds rate to remain low "for some time" due to weak economic conditions. This latest rate cut is the tenth in 15 months, and some worry that the Fed won't have anything else to cut if this latest move doesn't have much impact on helping the economy.

But the Fed promises to "employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."

"As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant," the Fed said in a statement.

"The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

The federal funds rate is the interest rate at which banks lend to each other, and the prime rate moves in step with the fed funds rate. The prime rate is normally 3% higher than the federal funds rate, so this rate cut can mean lower interest charges for consumers who have loans or credit lines tied directly to the prime rate. Home-equity loans, business loans, and some credit cards are generally tied to the prime rate.

Savings account interest rates are also typically tied to the prime rate, so this latest rate cut means that the earnings on deposits will drop to next to nothing.

Investors had been expecting a rate cut of .25 to .5% and anxiously awaited the Fed's decision until this afternoon. The Dow Jones Industrial Average quickly shot up after the Fed's announcement, closing up by 359 points for a gain of 4.2% today.



Source:
The Federal Reserve Board Google Finance