The US Federal Reserve slashed its target interest rate to nearly zero on Tuesday and is taking a number of other unprecedented moves in an effort to battle a financial crisis and recession. Consumers trying to buy a house or finance a car loan could be the big winners, but analysts caution that any upturn in the US economy 1s still months away.
The Fed announced that it was reducing its target for the federal funds rate to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest target rate in a half century.
And the central bank pledged to use “all available tools” to fight the current downturn. It said it was likely that rates would be kept at “exceptionally low levels” for some time to come.
“The Fed has taken some very historic steps and for the first time since this crisis began, they have gotten ahead of expectations instead of trailing behind them,” said Mark Zandi, chief economist at Moody’s Economy.com.
The Federal Reserve’s radical step prompted cuts elsewhere yesterday and threw the spotlight onto both a Bank of Japan (BOJ) meeting and other available policy measures.
Hong Kong followed the Fed with a full point rate cut to a record low of 0.5 percent and Kuwait’s central bank reduced its key policy rate by a half-point to 3.75 percent.
Norway’s central bank was expected to cut its main rate by 100 basis points to 3.75 percent later yesterday although a number of economists forecast an even bigger reduction.
The Fed’s move could push the BOJ to cut rates from 0.3 percent tomorrow.
Minutes of this month’s Bank of England (BOE) meeting showed a 9-0 vote for this month’s full-point UK rate cut and that an even bigger reduction was discussed but then rejected for fear of undermining any lingering confidence about the economy.
Central banks across the globe are slashing rates and eyeing unorthodox policy measures as the worst financial crisis in 80 years propels many countries into recession.
The BOE policymakers said further measures to underpin bank lending growth would be needed as well as rate reductions.
Initiatives to foster bank lending have already pushed the Fed’s balance sheet to US$2.2 trillion from US$887 billion. Some analysts say it could eventually top US$3 trillion.
The rapid expansion amounts to a form of quantitative easing, a policy pursued by Japan to expand the supply and circulation of money after it was forced to lower rates to zero.
The prospect of effectively littering the financial system with dollars pushed the US currency to a two-and-a-half month low.
A Fed official said on Tuesday it was not pursuing Japanese-style measures but was buying securities and making loans to improve mortgage and credit market conditions, although that also happened to expand its balance sheet.
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