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| US rates slashed to nearly zero | US rates slashed to nearly zero |
| (about 3 hours later) | |
| The US Federal Reserve has slashed its key interest rate from 1% to a range of between zero and 0.25% as it battles the country's recession. | The US Federal Reserve has slashed its key interest rate from 1% to a range of between zero and 0.25% as it battles the country's recession. |
| In its statement, the Federal Reserve warned that "the outlook for economic activity has weakened further". | In its statement, the Federal Reserve warned that "the outlook for economic activity has weakened further". |
| It predicted that rates would stay at the current exceptionally low levels "for some time". | It predicted that rates would stay at the current exceptionally low levels "for some time". |
| It added that it was considering ways it could spend money on supporting the economy and credit markets. | It added that it was considering ways it could spend money on supporting the economy and credit markets. |
| Analysts said that the key rate is now virtually zero. | Analysts said that the key rate is now virtually zero. |
| "Whether it's zero or 0.25% actually does not make a huge difference," said Holger Schmieding at Bank of America. | "Whether it's zero or 0.25% actually does not make a huge difference," said Holger Schmieding at Bank of America. |
| FROM THE TODAY PROGRAMME More from Today programme | FROM THE TODAY PROGRAMME More from Today programme |
| He added that the more important factor is what policymakers plan to do now that they cannot cut interest rates any further. | He added that the more important factor is what policymakers plan to do now that they cannot cut interest rates any further. |
| The Federal Reserve is already injecting billions of dollars into the banking system as well as buying debt based on home loans. | The Federal Reserve is already injecting billions of dollars into the banking system as well as buying debt based on home loans. |
| Postpone purchases | Postpone purchases |
| The Federal Reserve stressed that it was already planning to buy large quantities of additional debt based on mortgages and is considering whether it would be a good idea to buy long-term US government bonds. | The Federal Reserve stressed that it was already planning to buy large quantities of additional debt based on mortgages and is considering whether it would be a good idea to buy long-term US government bonds. |
| The strategy of a central bank buying government bonds mirrors the so-called quantitative easing carried out by the Japanese government when it was fighting deflation in the late 1990s and early 2000s. | The strategy of a central bank buying government bonds mirrors the so-called quantitative easing carried out by the Japanese government when it was fighting deflation in the late 1990s and early 2000s. |
| class="" href="/2/hi/business/7787484.stm">Q&A: Fed rate cuts | |
| Deflation becomes more of a risk as interest rates approach zero. | Deflation becomes more of a risk as interest rates approach zero. |
| It is a serious problem for an economy because people postpone making any large purchases as they believe prices are going to fall, which stifles economic activity even further. | It is a serious problem for an economy because people postpone making any large purchases as they believe prices are going to fall, which stifles economic activity even further. |
| Quantitative easing is, "just another word for the central bank injecting so much money into the system that a good deal of it is passed onto households and businesses at a reasonably low interest rate," Mr Schmieding explained. | Quantitative easing is, "just another word for the central bank injecting so much money into the system that a good deal of it is passed onto households and businesses at a reasonably low interest rate," Mr Schmieding explained. |
| The rate has been cut drastically by the Federal Reserve from the 5.25% where it stood in September 2007. | The rate has been cut drastically by the Federal Reserve from the 5.25% where it stood in September 2007. |
| Market response | Market response |
| It is the lowest the central bank's key rate - the target rate for banks to charge to lend to each other overnight - has been since records began in 1954. | It is the lowest the central bank's key rate - the target rate for banks to charge to lend to each other overnight - has been since records began in 1954. |
| The decision received a lukewarm initial reception from the stock market, with the Dow Jones Industrial Average rising from 8,684 just before the decision to 8,740 about half an hour after it, which is a rise of just 56 points. | The decision received a lukewarm initial reception from the stock market, with the Dow Jones Industrial Average rising from 8,684 just before the decision to 8,740 about half an hour after it, which is a rise of just 56 points. |
| But once the news had been digested, the Dow Jones closed up 360.4 points, or 4.2% at 8,924.9. | But once the news had been digested, the Dow Jones closed up 360.4 points, or 4.2% at 8,924.9. |
| "You've seen the dollar weaken because it was a larger than expected cut - the dollar is falling against all major currencies," said Matt Esteve at Tempus Consulting in Washington. | "You've seen the dollar weaken because it was a larger than expected cut - the dollar is falling against all major currencies," said Matt Esteve at Tempus Consulting in Washington. |
| "On one side, we effectively have a zero interest rate in the US - on the other side, the Fed has sent a sign that they are ready to use all tools to help the US economy out of recession." | "On one side, we effectively have a zero interest rate in the US - on the other side, the Fed has sent a sign that they are ready to use all tools to help the US economy out of recession." |
| Earlier in the day, official data confirmed that the threat of inflation is receding, as consumer prices fell a record 1.7% in November. | Earlier in the day, official data confirmed that the threat of inflation is receding, as consumer prices fell a record 1.7% in November. |
| Government help | Government help |
| President-elect Barack Obama said in a speech on Tuesday that his administration would also be doing its bit to stimulate the economy because the central bank could no longer use its main tool. | President-elect Barack Obama said in a speech on Tuesday that his administration would also be doing its bit to stimulate the economy because the central bank could no longer use its main tool. |
| "We are running out of the traditional ammunition that is used in a recession, which is to lower interest rates," he said. | "We are running out of the traditional ammunition that is used in a recession, which is to lower interest rates," he said. |
| "That's why the economic recovery plan is so absolutely critical." | "That's why the economic recovery plan is so absolutely critical." |
| He has undertaken to create at least 2.5 million jobs by 2011 as well as launching a programme of improvements to the country's infrastructure. | He has undertaken to create at least 2.5 million jobs by 2011 as well as launching a programme of improvements to the country's infrastructure. |
| Are you in the US? What difference will the latest rate cut make to you? Send your comment using the form below: | Are you in the US? What difference will the latest rate cut make to you? Send your comment using the form below: |