Tuesday, 16 December 2008

Fed Slashes Rate to as Low as Zero; Hints Asset Purchases as Next Step

Just a few minutes ago, the Federal Reserve announced that it cut the benchmark interest rate to a range between zero and 0.25 percent. This is probably the penultimate step that policymakers have in mind before buying assets in the financial markets to prop up valuations and counter the worst economic crisis since the end of WWII. 

The Fed is also joining the league of aggressive central banks whose most memorable member is the Bank of Japan. We really hope that the U.S. economy isn't entering the same phase that japan entered in the early 1990s, when a deep recession forced policymakers to keep borrowing costs at zero for years as the country struggled with prolonged deflation signs.

The thing here is, nine reductions in the Fed funds rate and about $2 trillion of government money funneled into banks and the financial system have failed to avert what seems to be the worst recession after the Great Depression. The Fed said today it may expand the programme of repurchasing mortgage and other type of debt into other types of securities (and that is why Treasury and corporate bonds are rallying!) 

We are far away from the end of this crisis. Hopefully, once President-Elect Barack Obama takes office, the stimulus programme that he is devising now will help revive demand. Let's hope the recessive symptoms will only stay around until the end of 2009 and that some recovery signs will begin to be felt around a few months earlier than that. 

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