Federal Reserve statement in full

The Federal Reserve yesterday threw away the monetary policy rule book it has been using for 50 years in its most dramatic effort yet to stem the global economic crisis.

In a single stroke, the US central bank in effect eliminated the cost of borrowing money between banks overnight. It promised that US rates would stay at or near zero for the foreseeable future. And, acknowledging that it now has no more room to cut rates, it announced new, unprecedented measures to stimulate the economy, namely pouring cash into almost every crevice of the financial system and massively expanding its own balance sheet.

The two-day meeting of the Fed’s open market committee which ended yesterday must have been one of the most extraordinary in the central bank’s 95-year history. For more than a year the Fed has been deploying all kinds of weapons – traditional monetary policy implements as well as hastily-manufactured new ones – to prevent the US economy from collapsing into a deep and enduring depression.

But, indicating the gravity of the crisis and the failure of all those previous efforts to turn things around, Ben Bernanke, the Fed chairman, and his colleagues, today threw every remaining tool in their toolbox at the financial markets.

There were three key elements to the Fed’s move – each of them dramatic in its own right.

First, it cut rates once again from the existing one per cent to something close to nothing. But, instead of announcing a target rate for the overnight interest rate – as it has done for the last decade – the Fed said it would aim to keep the rate in a range – between zero and a quarter percentage point. This unusual move reflects the fact that the federal funds rate – a market interest rate that the Fed can move only indirectly – has been volatile recently because of continuing strains in the interbank lending market.

Second, in its statement accompanying the move, it noted that the US economy had deteriorated on almost all fronts in the last few weeks, and it said that those “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

The Fed rarely commits itself to future policy decisions but those words are tantamount to saying that rates will remain at or near zero for a long time.

Third, Mr Bernanke has launched the US on an uncharted path of what economists call “quantitative easing”, emergency measures to stimulate an economy in the clutches of deflationary collapse.

With short-term interest rates now at zero, the central bank can no longer cut rates to stimulate the economy. Instead, it can in effect print money, by buying up all kinds of assets and flooding the economy with cash. The Fed’s statement said it would begin buying mortgage-backed securities on the open market. It also announced it was evaluating buying up long-term government debt.

The significance of this development is that it will push interest rates on these assets substantially lower from their already low level. That should help stimulate demand.

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