The Fed Goes To Defco​n 1

[Mrs. Sharon B. Hodge]

The Fed Goes To Defco​n 1




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The Fed goes to Defcon 1
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Commentary: A promise to do everything it must to avert a depression

By MarketWatch
Dec 16, 2008

http://www. marketwatch. com/news/story/The-Fed-goes-Defcon-1/story...

(MarketWatch) -- The Federal Reserve declared war on Tuesday, promising to do whatever it takes to prevent a depression

With the economy teetering on the edge of a prolonged slump, the central bank's policy-making Federal Open Market Committee slashed interest rates on Tuesday to near zero, and vowed to use "all available tools" to keep the economy from collapsing into a depression.
See full story

After a two-day meeting in Washington, Bernanke rounded up even the most reluctant members of the FOMC to unanimously endorse the most drastic actions this central bank has ever taken

To no one's surprise, the Fed said the economic outlook had "weakened further," and it set aside any immediate worries about inflation.
For the next while, all of the Fed's focus will be on easing the credit crunch, pumping money through the financial system, and getting the economy growing again
"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the statement said.
Read the statement

Now that traditional monetary policy as we know it has been exhausted, the Fed will take ever-more creative steps to boost growth.
In simple terms, the Fed will flood the financial system and economy with as much money as it has to

How does it do that? The Fed will buy debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac. It's considering buying longer-term Treasurys, including notes and bonds.
It will also implement a new lending program to support credit for households and small businesses
And the Fed said it wouldn't stop there.
"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the committee said

Critics will say Helicopter Ben has taken off and is now prepared to drop billions of dollars across the landscape, destroying the economy with a hyperinflationary spiral But cooler heads will counter: What choice does he have?



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Federal Reserve Slashes Interest Rate to Historic Low
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By Neil Irwin and Howard Schneider
Washington Post Staff Writers
Tuesday, December 16, 2008; 3:42 PM

http://www. washingtonpost. com/wp-dyn/content/article/2008/12/16/A...

The Federal Reserve slashed a key short-term interest rate to effectively zero today, and signaled that it will "employ all available tools" to try to arrest the nation's economic freefall

In a bold show of force that is without historical precedent, the Fed said it will cut its target for the federal funds rate, at which banks lend to one another, to a range of 0 percent to 0.25 percent. The target was previously 1 percent.
The move cuts the rate to the lowest it has been in the 54 years that records go back, and stunned market watchers who expected a more modest cut

In its unanimous decision, the Federal Open Market Committee, the Fed's policymaking arm, said it "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
" That essentially committed the central bank to not raising rates for the foreseeable future

It also said it will keep looking for new ways to use its powers to further boost the economy, despite having already cut short-term interest rates as low as they can go

"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the statement said

The stock market had been up about 1.2 percent just before the announcement today, and it jumped sharply after the 2:15 p.m. action. It was up 4.1 percent, or 354 points on the Dow Jones industrial average, at 3:37 p.
m

In normal times, the lower rate would stimulate the economy by making it cheaper for Americans to borrow money through credit cards, to expand a small business, or to get an adjustable rate mortgage. In the current environment, with banks in crisis mode and many credit markets all but shut down, the rate cut's likely impact is less clear.
Lenders have not passed recent Fed rate cuts through to customers the way they would in normal times

Nonetheless, the move was the latest example of the Fed using all the tools at its disposal -- including some that had never been used and others that didn't even exist before -- to try to end the most profound economic crisis in at least a generation

Indeed, with little room left to cut the federal funds rate, its normal economic policymaking tool, the Fed wanted to signal that it has other things it can do to stimulate growth as the recession deepens

The central bank has already indicated it will buy $600 billion worth of mortgage-related securities next year, pumping money into the economy through unconventional means.
The statement today suggested that it could undertake other such actions, known as "quantitative easing"

The statement directly raised one such possibility, saying that the Fed could buy long-term U.S. Treasury bonds to try to directly affect long-term rates.
Another possibility would be for the Fed to expand its purchases of other kinds of debt, such as private mortgage-backed securities and commercial real estate loans

Christine M.
Cumming, a vice president of the Federal Reserve Bank of New York, voted in place of New York Fed President Timothy Geithner, who is to be named Barack Obama's Treasury Secretary; the Fed attempts to maintain independence from political authorities

In an illustration of why inflation has subsided as a concern for the Fed, consumer prices fell at a record rate in November and housing starts plummeted to a level not seen in nearly half a century, stark signs of the weakness that has spread through the U.S.
economy

The consumer price index fell 1.7 percent in November, the Labor Department said, the second consecutive record-setting monthly drop.
Led by the steep decline in energy prices, the report could even raise concerns about a general deflation -- a widespread and steady drop in prices that can undermine businesses and dissuade consumers from making any but the most necessary purchases in hopes of even lower prices in the future

Excluding food and energy prices, which are particularly volatile, so-called core inflation was flat, at 0 percent

There was continued weakness in the troubled housing sector as well. Housing starts fell in November to a seasonally adjusted annualized rate of 625,000 -- the lowest since the federal government began keeping records in 1960.
That represents a nearly 19 percent drop from the month before, and a close to 50 percent drop from a year ago

Building permits, a barometer of future activity, fell to a seasonally adjusted annualized rate of 616,000, 15.
6 percent below October and a 48 percent decline over November a year ago.