Federal Reserve Establishes Target Range: 0 to 25 Basis Points

From ClusterStock.com, Dec. 16, 2008:

Forget the target rate! The Fed is establishing a range for federal funds, which will be zero to a quarter of a percent. Perhaps most importantly, they said that rates would be low for a very long time and that the Fed is focused on financial market stability and economic growth.

Prior to today's announcement, there had been a lot of debate that the Fed may actually be adopting a new approach, perhaps targeting a LIBOR rate or even a mortgage rate. But we never heard that they would be establishing a target range.

This wouldn't be the first time the Fed changed the objective of its open markets operations. Until the 1980s, the FOMC didn't target a specified level for the federal funds rate, aat all.  It wasn't until 1994 that FOMC began announcing changes in its policy stance. And it didn't explicitly state its target rate until a year later. That FOMC statesment we all read shortly after each meeting wasn't published until 2000.

Here's the full statement:

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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco.  The Board also established interest rates on required and excess reserve balances of 1/4 percent. 

See Also: Bernie Madoff's Victims: The Slideshow