Fed Sharply Cuts Key Interest Rate The Federal Reserve has cut the federal funds rate to the lowest level on record. The new target is a range of zero to 0.25 percentage points. The drop in the rate is expected to result in a quick reduction in the prime lending rate.
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Fed Sharply Cuts Key Interest Rate

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Fed Sharply Cuts Key Interest Rate

Fed Sharply Cuts Key Interest Rate

Fed Sharply Cuts Key Interest Rate

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The Federal Reserve has cut the federal funds rate to the lowest level on record. The new target is a range of zero to 0.25 percentage points. The drop in the rate is expected to result in a quick reduction in the prime lending rate.

MICHELE NORRIS, Host:

From NPR News, this is All Things Considered. I'm Michele Norris.

MELISSA BLOCK, Host:

And I'm Melissa Block. There was a surprise move at the Federal Reserve today. The Fed was expected to cut interest rates by a half point. Instead, the Fed cut the key lending rate by as much as a full point to zero. That's the lowest federal funds rate on record. To be exact, the Fed wants that key rate to fall within a range between zero and a quarter of one percent. And if hitting zero sounds like the Fed has run out of ammunition, Fed policymakers made clear that is not the case. Joining us to explain the situation is NPR's Chris Arnold. And Chris, how big a deal is this key interest cut?

CHRIS ARNOLD: Hi, Melissa. It's a very big deal, and this was not expected. Everybody was expecting, you know, maybe a half a point rate cut or something, and this caught everybody by surprise. The government here is showing that it's willing to pull out all the stops, and it is in fact pulling out all the stops with regard to this interest rate.

And it's basically saying, you know, we understand that this is shaping up to be the worst recession in about 30 years. And most importantly, the Fed's signaling that it's going to do even more, that more help is going to be on the way. And the market liked that today. The Dow was up about 360 points.

BLOCK: You're saying more help is going to be on the way. What else would the Fed be likely to do?

ARNOLD: Well, as you said in the beginning, you know, it can't cut this particular interest rate any more, but the Fed's been cutting a very short term interest rate. And that's the rate that banks loan money to each other, sometimes for just a few hours, you know, overnight and that sort of thing. The Fed is now signaling that it wants to drive down longer-term interest rates. And in the statement that it released today, it said that it was going to purchase, quote, "large portions of mortgage-backed securities and other types of debt."

And the idea is that that's going to push down rates on home mortgages. And that's something everybody can relate to. I mean, if rates get down, say, four and a half percent on home mortgages, it means, you know, you and me and everybody else, we could go out and refinance our homes and have one, two, three hundred more dollars in our pocket every month, and that could really help the economy. And that's just one example. There's a lot more the government can do besides cutting this one interest rate.

BLOCK: Yeah. And if this is the lowest that the federal funds rate has ever been, does that mean that the Fed thinks that things right now are as bad as they could be?

ARNOLD: Well, not really. I mean, what this shows is that the Fed thinks that this is an opportunity and that it has an opportunity here to fight this recession much more aggressively than it's fought other recessions. And if you look back to the early 1980s, inflation back then was a big problem. And that was a very bad recession, but the government had its hands tied. I mean, it couldn't really try to stimulate the economy aggressively because it was afraid of driving inflation even higher, and so it was kind of stuck.

Here, you know, the government's saying, you know, we've got a free hand and there's really a lot that we can do. So that's kind of, you know, this is a bad situation, but that's probably a good thing. Most economists are still hoping that this recession won't be as bad as that one back in the early 1980s. Back then unemployment rose to about 10, almost 11 percent, and this time they're hoping maybe it won't go above nine.

BLOCK: One last thing, Chris. Why did the Fed set this range of zero to a quarter of one percent? Why not just zero?

ARNOLD: Well, here, just quickly, the government's saying that it's acknowledging that it's having trouble nailing down a hard number. There's just so much happening. And it's saying, look, that's OK, the interest rates might fluctuate, but don't worry about it. And we're just going to let it flow.

BLOCK: OK. NPR's Chris Arnold, thanks a lot.

ARNOLD: Thanks, Melissa.

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Fed Cuts Key Interest Rate To Near Zero

The Federal Reserve on Tuesday cut its target for 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 slashed its key short-term interest rate to a range of zero to 0.25 percent — down from the 1.0 percent target set Oct. 29. Many analysts had expected the Fed to make a smaller cut to 0.5 percent.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the central bank said in a statement. "In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

Fed policymakers said that since their last meeting, "labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."

Inflation pressures have "diminished appreciably," the Fed said, and in light of lower prices for energy and other commodities and "weaker prospects for economic activity," inflation is expected to moderate further in coming quarters.

The Fed also said it "will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

From NPR staff and wire reports