The US Federal Reserve used up its ammunition on monetary policy last night by slashing its base lending rate to virtually zero but pledged further efforts to stimulate credit and revive a depressed economy.
The actions by Fed chairman Ben Bernanke and his colleagues put the Fed on track toward the kind of extraordinary actions used by Japan to stave off deflation and fire up growth in the 1990s.
The Federal Open Market Committee lowered its target federal funds rate from 1%, already at a historic low, to a range of zero to 0.25%. It also predicted 'exceptionally low' rates will persist for some time.
In addition to the rate cut, the Fed said it was prepared to expand a plan to purchase large amounts of debt issued or guaranteed by government-sponsored mortgage agencies.
It also said it was mulling possible purchases of longer-term US Treasury debt and would consider other ways to tap its burgeoning balance sheet to support the economy.
'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,' it said.
The Fed's announcement spurred a big rally in US stocks last night, with the Dow Jones closing up 4.2%. Financial markets had expected the Fed to lower rates by no more than three-quarters of a percentage point.
US authorities have been unable to prevent the recession from deepening despite a range of unprecedented initiatives designed to encourage lending by loss-scarred banks.
They stepped up their actions after the failure of investment bank Lehman Brothers in September intensified the financial turmoil.
In addition to rate cuts, the Fed has pumped massive amounts of money into credit markets, pushing the size of its balance sheet to $2.2 trillion from $887 billion over the last three months.
Evidence of how sharply the US economy is braking came in a report on December 5 that showed employers shed 533,000 jobs in November, the most in 34 years while the unemployment rate shot to a 15-year high of 6.7%.
Some economists expect output to fall at more than a 6% pace in the fourth quarter and many forecast the economy will shrink through the first half of 2009.
In a speech earlier this month, Fed Chairman Ben Bernanke said the bank had a menu of measures from which to choose to lift the economy even if rates fell to near zero.
'Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver - the provision of liquidity - remains effective,' he said.
