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Fed Cuts Its Benchmark Interest Rate to Near Zero

The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

Going further than analysts anticipated, the central bank cut its target for the overnight federal funds rate to a range of 0 to 0.25 percent, a record low, virtually bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation. The rate had previously been 1 percent, and a cut of a half-point had been widely expected.

The move, which affects the rate at which banks lend their reserves to one another, was to a large degree symbolic. Demand for interbank loans has been so low that the actual Fed funds rate has been far below the previous target for a month and hovered at barely 0.1 percent in the last several days.

In its statement announcing the cut, the Fed’s Open Market Committee made it clear that it still had ammunition with which to stimulate the economy and referred the wide array of new lending programs that essentially allow it to pump money directly into financial institutions.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” it said. Among those tools, it cited the continuing purchase of agency debt and mortgage-backed securities and the “potential benefits of purchasing longer-term Treasury securities.”

round and round she goes, where she stops, nobody knows...

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