Wall Street was expecting an unspectacular announcement from the Federal Reserve today. Instead, Ben Bernanke & Co. decided to pull out all the stops with a full three-quarter point rate cut and an unusually specific commitment from the central bank to keep interest rates low "for some time" as part of continually expanding efforts to help fix an ailing economy.
The Fed cut the benchmark federal funds rate to a quarter of a point from one percent and central bankers said they'll continue to keep rates in a "target range" between zero and a quarter point as the Fed now "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
The statement reads like the central bank is preparing to hunker down for a long fight:
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. 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 Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. 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 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. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Analysts react (bold is mine):
High Frequency Economics:
So here we are: Rock bottom. We take no satisfaction from the vindication of our view that one basis point is the right rate for the U.S; it is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues. The FOMC acknowledges that "the economy has weakened further and that inflation pressures have "diminished appreciably". The Fed's objective now is to "employ all available tools" to fix the economy, including purchases of agencies, MBS, consumer ABS and, perhaps long Tsys and "other" measures. If zero rates don't work, they will try anything; good. But this is a terrible, chastening day.
As usual, a surprise rate cut means a rally in stocks and markets are off and running on the news. The Dow is up more than 2 percent, and the Nasdaq climbed 3.2 percent shortly after the announcement.
Unfortunately the above statement, including new willingness to consider extending credit to households and small businesses, smacks of a central bank that's still far from comfortable that its already unprecedented intervention in markets and the economy is having any lasting postive effect.