Fed's earlier announcement (highlights are mine):
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's 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.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be 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. 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 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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
Economist's reactions:
Economists React: 'Who Could Ask for Anything More?'
Today's FOMC statement will go down in the annals of Fed history along with Paul Volcker's Saturday announcement going to reserve targeting in 1979. Volcker's press conference was called the "Saturday Night Massacre." I nominate this one to be called the "Who Could Ask for Anything More?" statement. The Fed is throwing everything in its arsenal at the economic/financial situation. –Stephen Stanley, RBS Greenwich Capital
The core was restrained The FOMC statement was more aggressive than anticipated, indicating that policymakers "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." The vote was unanimous. In our view, here are the three most surprising aspects of the statement: 1) The official target rate was reduced all the way to 0.0% to 0.25% (let's call it 0.125%)… 2) A conditional commitment to keep the policy rate low "for some time." … 3) An indication that the Fed is considering the purchase of long-term Treasuries." –David Greenlaw, Morgan Stanley
In practical terms, the decision to slash the target rate will do almost nothing to boost economic activity. However, it does send a strong message to the markets that the Fed means business, particularly when combined with the commitment to leave rates at near zero for some time. With official interest rates now as close to zero as they are going to get, the Fed's focus has already switched to quantitative easing. –Paul Ashworth, Capital Economics
So here we are: Rock bottom. We take no satisfaction from the vindication of our view that one basis point is the right rate for the U.S; it is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues… The Fed's objective now is to "employ all available tools" to fix the economy… If zero rates don't work, they will try anything; good. But this is a terrible, chastening day. –Ian Shepherdson, High Frequency Economics
Assuming that fed funds will not trade below 0%, there will be no interest rate constraint on accelerating the pace of the Fed's balance sheet expansion. Rather, the 0.25% upper end of the target range will be serve as a ceiling, proximity to which will signal that more aggressive liquidity infusions are warranted. –Alan Levenson, T. Rowe Price
The action taken today and the quantitative easing moves to come speak volumes about just how petrified policymakers are that the economy is in danger of sliding into a deflationary spiral that would be disastrous considering the highly leveraged condition of the economy. Monetary policy is going to do whatever it can to try to avoid this outcome, and further substantial fiscal stimulus is also in the works. –Joshua Shapiro, MFR Inc. The Federal Reserve wants to stabilize the financial system and prevent the economy from a deeper and protracted recession. It also is trying to make sure that the probability of a debilitating deflation is very low. However, this type of unconventional monetary stimulus has risks. Even though inflation is in remission for now, there is a meaningful risk of an inflation bubble later, especially if the central bank is successful in stimulating the economy. For now, Helicopter Ben has to put out the big fire and worry about the inflation bubble later. –Sung Won Sohn, Smith School of Business and Economics
The Fed has signaled that it is formally switching to a quantitative easing strategy that will further increase the size of its balance sheet. The Fed suggested that it would potentially up-size its purchases of GSE debt (currently set at $100 billion) and Agency MBS (currently set at $500 billion) and that it will roll out the Term Asset-Backed Securities Loan Facility in early 2009. The Fed also said that it is weighing the benefits of purchasing long-dated Treasuries—though we judge this step is still an unlikely one for the Fed to take (since it is trying to narrow the spread between MBS and Treasuries). Support for economic growth needs to come from fiscal policy at this point and we expect passage of a massive stimulus package in the first quarter of 2009. –RDQ Economics
