[Marxism] Fed slashes interest rates to virtual zero as deflationary trend grows

Fred Feldman ffeldman at bellatlantic.net
Tue Dec 16 18:26:08 MST 2008

By Krishna Guha

Financial Times (London)
December 16, 2008


WASHINGTON -- The U.S. Federal Reserve moved deeper into uncharted water
on Tuesday heralding a raft of dramatic and unconventional measures to
support the economy as it slashed interest rates from 1 per cent,
virtually to zero.

In a historic statement, the U.S. central bank said interest rates would
now be fixed at a new record low in a range from zero to 0.25 per cent. 
It also vowed to use "all available tools to promote the resumption of
sustainable growth and to preserve price stability" -- prompting a plunge
in the dollar but a rally in U.S. stocks.

The statement came as new data showing prices fell a record 1.7 per cent
in November with no rise even in core prices excluding energy and food
raised fresh fears about deflation, and housing starts plummeted further.

The Fed's action came amid signs that Europe too is plunging deeper into
recession. The Purchasing Manager's Index, a closely watched economic
survey, showed the 15 country eurozone on course to report its worst
quarter on record, adding to the pressure the European Central Bank to
follow the Fed's lead and cut rates further.

The U.S. central bank said it "stands ready" to step up its planned
purchases of securities issued by Fannie Mae and Freddie Mac, the mortgage
giants now under government control -- sending their yields tumbling. And
it said it was "also evaluating the potential benefits of purchasing
longer-term Treasury securities."

These moves form part of a set of radical options laid out in the Fed
statement which the central bank said were now under active consideration.
The U.S. central bank did not launch any specific new programs at the

The Fed said the outlook for economic activity had "weakened further" and
acknowledged that "inflationary pressures have diminished appreciably."

The decision to set a range for the Fed funds rate reflects an admission
that the U.S. central bank -- which normally targets an exact rate -- is
no longer able to tightly control the actual rate that prevails in the
market because of the massive creation of reserves.

It also said it would keep the size of its balance sheet "at a high level"
-- implying a high level of bank reserves available and therefore the
money supply. By increasing the quantity of reserves the Fed is
guaranteeing a plentiful supply of money to the financial system -- a
vital step in battle against deflation.

Noting that it would soon establish a previously announced facility to
support the asset-backed securities market, the Fed said it will "continue
to consider ways of using its balance sheet to further support credit
markets and economic activity."

The promise that aggressive policy interventionism will continue even
though rates are now at the zero bound appeared intended to convince the
markets that the Fed has not run out of ammunition.

Meanwhile, President-elect Barack Obama told reporters that the fact that
the Fed had run out of room to cut rates further underscored the case for
a big fiscal stimulus.

"We are running out of the traditional ammunition that's used in a
recession, which is to lower interest rates. They're getting to be about
as low as they can go," he said. "And although the Fed is still going to
have more tools available to it, it is critical that the other branches of
government step up."

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