Radical US Federal Reserve action expected with rate cut


Gary Duncan
Times Online
December 15, 2008

The US Federal Reserve is tipped tomorrow to pave the way for it to take more extraordinary measures to kick-start the American economy after it cuts interest rates to an historic low of only 0.5 per cent. The Fed is expected to cut the key US official interest rate, its Fed Funds target rate, by another half-point from the present 1 per cent level that matches past record lows.

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But with still lower official rates seen as unlikely to deliver much of an extra boost to stalled US growth, markets are on alert for the Fed to map out action through radical measures to pump funds into the economy.

Another cut in the official rate is seen as likely to prove mainly symbolic. This is because this official rate is in reality only a target for the cost to US banks of borrowing from each other overnight, through the Fed. In practice, distortions in the marketplace have already pushed the true rate at which the US banks can borrow overnight well below the Fed target, to levels approaching zero.

With serious practical dangers to the US economy likely to be posed by cutting rates much below 0.5 per cent, the Fed is likely to use its statement to set out alternative, aggressive action that it can take in place of conventional cuts in interest rates.

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