Fed cuts rate to virtual zero

December 17, 2008

, WASHINGTON, December 17 – The US Federal Reserve slashed its key interest rate to virtually zero Tuesday to counter deflation and a global financial crisis as European governments braced for deeper recession.

The central bank\’s Federal Open Market Committee lowered its target federal funds rate from 1.0 percent, already at a historic low, to a range of zero to 0.25 percent.

The rate action had been widely expected as the world\’s largest economy sinks deeper into a year-old recession and the worldwide credit crunch cripples advanced economies and slows emerging economies.

"Since the committee\’s last meeting (October), labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the Fed said after its unanimous decision.

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

Additionally, the Fed said it would take other steps to stimulate lending and economic activity, including large purchases of mortgage securities to help unblock credit.

US stocks soared after the Fed action. The Dow Jones Industrial Average leapt 362.32 points (4.23 percent) to 8,926.85 at the closing bell.

The Nasdaq jumped 81.55 points (5.41 percent) to 1,589.89 and the Standard & Poor\’s 500 broad-market index vaulted 44.69 points (5.15 percent) to a preliminary close of 913.26.

President George W. Bush said in an interview that he had been forced to sacrifice free market principles to save the economy from "collapse."

"I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we\’re in a crisis now. I mean, this is — we\’re in a huge recession, but I don\’t want to make it even worse," Bush added on CNN.

The aggressive US rate cut came amid another day of troubling economic news, with inflation slowing and governments issuing dismal growth forecasts.

Consumer prices in the United States plunged a record 1.7 percent in November from October, raising fears of deflation that were echoed in Britain and France, which both reported sharp drops in their 12-month inflation in November.

"This disinflation movement is very brutal," Nicolas Bouzou, head of Asteres, an economic consultancy, said in reference to the sharp slowdown in France\’s inflation which he blamed on falls in world commodity prices.

"The collapse has become clear," said the Kommersant business newspaper in Moscow, referring to an industrial output slump of 10.8 percent in November from October.

It was Russia\’s first industrial output decline since early 1999, in the wake of the 1998 financial crisis.

News from Russia\’s ex-Soviet neighbor Ukraine was even more alarming.

Ukrainian President Viktor Yushchenko said economic contraction in the first quarter of 2009 could be as high as 10 percent following a crisis in the banking system and a slump in demand for steel, Ukraine\’s main export.

In Europe\’s biggest economy, Germany, the Frankfurter Allgemeine Zeitung newspaper quoted a government memo saying contraction in 2009 could be three percent or more, which would be the worst recession in Germany\’s post-war history.

Switzerland forecast its economy will shrink by 0.8 percent in 2009 as the global economic crisis bites and unemployment rises, with a recovery not seen until 2010.

Sweden\’s government projected the economy would contract 0.8 percent next year due to the widening global financial crisis, the country\’s worst economic performance in three decades.

South Korea cut its 2009 economic growth forecast by one percentage point to three percent, with President Lee Myung-Bak telling the cabinet that "next year will be the most difficult year, especially the first half."

The grim economic news came as the fallout continued from a massive alleged scam run by Wall Street figurehead Bernard Madoff, which could force some of the world\’s biggest banks to wipe billions off their balance sheets.

London-based HSBC, Spain\’s Santander and Fortis Bank Netherlands alone revealed potential losses of more than five billion dollars as a result of the pyramid scheme fraud, which has turned the spotlight on US market regulation.

The US Securities and and Exchange Commission (SEC), the US financial regulatory body, said late Tuesday it would launch an in-house investigation into why it did not earlier respond to red flags concerning Madoff despite almost a decade of warnings.

In other market developments, the dollar and oil prices fell ahead of an OPEC meeting on Thursday expected to announce output cuts.

OPEC plans to announce an output cut of two million barrels a day, the Saudi oil minister, Ali al-Nuaimi, said, as the cartel looked to non-member Russia to help it prop up sagging oil prices.

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