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Fed Cuts Benchmark Rate to Near Zero

By EDMUND L. ANDREWS and JACKIE CALMES
Published: December 16, 2008
WASHINGTON — 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 said it had cut its target for the overnight federal funds rate to a range of zero to 0.25 percent, a record low, bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation.

The move to a zero rate, which affects how much banks charge when they lend their reserves to each other, is to some degree symbolic. Though the Fed’s target had had previously been 1 percent, demand for interbank lending has been so low that the actual Fed funds rate has hovering just above zero for the past month.

Far more important than the rate itself, the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.

In essence, the Fed is embarking on a radically different route to stimulate the faltering economy, and it puts the Fed chairman, Ben S. Bernanke, in partnership with the incoming Obama administration as it moves on a parallel track.

I would suggest that the Fed is not embarking on a radically different route, but instead it is radically accelerating down a route it's been on for some time.