Financial Reform Watch

Fed Makes Unprecedented Cut to Key Interest Rate

Today's actions by the Federal Open Markets Committee may have a salutary effect on the credit market. But they do point out that the limits of the benefits of monetary policy are being severely tested in the current crisis. The committee took three major action's today, it:

  • dropped the federal funds target rate to a range of zero to 25 basis points;
  • announced it is committed to keeping interest rates low "for some time"; and
  • announced plans to purchase longer-term Treasury bonds.

In announcing the actions the Fed stated it was using all the tools at its disposal 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."

When interest rates are effectively set at zero, there is little room left to maneuver for the Fed, at least in that area. The Fed continues to add currency to the money supply and appears ready to purchase federal debt over a sustained period. The fact that all these actions are being taken and the economy continues a downward slide would appear to leave the way open for further efforts of a fiscal nature to achieve recovery and restore the credit markets.

New economics text books are being written as we write.


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