The further reduction of the federal funds rate — which banks charge each other for overnight loans — points to the dire straits of the U.S. economy. The U.S. Federal Reserve cut the target from 1 percent to a range between zero and 0.25 percent.
In an attempt to rescue the economy, the Fed has dared to resort to a virtual zero-interest rate policy for the first time and declared that “exceptionally low levels of the federal funds rate” are likely to last “for some time.” Thus it has done all it can as far as rate cuts are concerned.
The Fed’s statement, issued after the Federal Open Market Committee unanimously approved the rate cut, also shows that the U.S. economy is in such bad shape that a traditional monetary policy tool is not enough. It said the Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” It noted that since the last FOMC session on Oct. 29, labor market conditions have deteriorated and consumer spending, business investment and industrial production have declined.
In addition to the virtual zero-interest rate policy, the U.S. central bank will take unconventional steps, including large purchases of agency debt, commercial paper issued by enterprises, and mortgage-related and consumer loan-related securities. It also said it was “evaluating the potential benefits of purchasing longer-term Treasury securities.” The Fed has clearly moved to a policy of quantitative easing aimed at keeping the money supply in the market at a high level to help enterprises and consumers.
With the latest rate cut, America’s key interest rate went lower than the key interest rate for Japan — about 0.3 percent — for the first time since February 1993. Although the Japanese government welcomed the Fed’s move, the move has steeply raised the yen’s value against the dollar, dealing a further blow to export-oriented Japanese enterprises. Since the key interest rate is already very low, the Bank of Japan will have to think carefully in deciding its next step.
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