Fed cuts interest rates to near zero to combat economic recession

ByABC News
December 16, 2008, 3:48 PM

WASHINGTON -- The Federal Reserve Tuesday cut its target for a key short-term interest rate to a record low range of zero to 0.25%, from the previous 1%, and vowed to maintain "exceptionally low rates" for "some time".

The dramatic move sent stocks soaring as the Dow Jones industrial average surged 4.2% and broader indexes jumped more than 5% after the central bank said it would accelerate its use of nonconventional tools to stimulate the economy, like buying mortgage-backed securities or Treasury notes.

In a statement announcing its actions, the central bank's policymaking Federal Open Market Committee, which was unanimous in its decision, said the job market, business and consumer spending and manufacturing had all weakened since its Oct. 29 meeting, while inflation pressures "diminished appreciably. It promised to do whatever it takes to support the economy.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said. "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 Dow rose 359.61 to 8,924.14 after having been up about 100 in subdued trading ahead of the Fed's announcement.Broader stock indicators also rose. The Standard & Poor's 500 index advanced 44.61, or 5.14%, to 913.18, and the Nasdaq composite index rose 81.55, or 5.41%, to 1,589.89.

"All in all, it's good news for stocks," said Jack Ablin, chief investment officer at Harris Private Bank. "It gave the market a little bit more than they expected."

The Fed said it is evaluating the potential benefits of buying longer-term Treasury securities, which would bring down interest rates on those instruments.

The federal funds rate is what banks charge each other for overnight loans. The funds rate, the central bank's preferred policy tool in recent years, is a benchmark for many consumer and business loans.