Fed Cuts Benchmark Interest Rate to Record Low

WASHINGTON, DC, Dec. 16, 2008—The 10-member board of governors at the Federal Reserve Bank stunned financial analysts and market watchers today by lowering the benchmark interest rate to zero to one-quarter percent. The previous record low rate was 1 percent.

The rates statement by the Federal Open Market Committee conceded that an even lower rate might be set in the near future.

“…Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” according to the one-page statement.

In the prepared statement, Federal Reserve Chairman Ben S. Bernanke (top right photo) said the unprecedented low rate was set by the governors because “labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

To boost the commercial and residential real estate industries, the Fed promised, “over the next few quarters, to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it (also) stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.”

Small businesses and households were also promised some financial relief by early next year. At that time, the Fed will use a portion of the $700 billion Congress-approved Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses,” according to the statement.

“Financial markets remain quite strained and credit conditions tight,” the statement said. “Overall, the outlook for economic activity has weakened further.”

However, there was a sliver of good news.

“Inflationary pressures have diminished appreciably,” the Fed board believes. “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 Fed promised to “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

The statement said “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.”

The Committee is also “evaluating the potential benefits of purchasing longer-term Treasury securities.”

In a related action, the board of governors unanimously approved a 75-basis-point decrease to the 1.25 percent Federal Discount Rate to ½ percent.

The board also established interest rates on required and excess reserve balances of ¼ percent.

Voting for the benchmark interest rate decrease today were nationally-known banking figures that included seven men and three women.

They were Chairman Bernanke, Christine M. Cumming, (top left photo) Elizabeth A. Duke,(middle right photo) Richard W. Fisher, Donald L. Kohn, Randall S. Kroszner, Sandra Pianalto, (bottom left photo) Charles I. Plosser, Gary H. Stern and Kevin M. Warsh.