Fed cuts rates means business

Fed Cuts Key Interest Rate To Between Zero and 0.25
The Federal Reserve slashed the target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

The central bank reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October.
CNBC.com
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Federal Reserve Chairman Ben Bernanke and his colleagues also pledged to use "all available tools" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

"There is no more room to cut rates, as the target cannot go negative," said economist Chris Rupkey of Bank of Tokyo-Mitsubishi. "Quantitative easing will be the new way for the Fed to stimulate the economy going forward."

In its statement, the Fed underscored its committment to use extraordinary measures, including using its balance sheet to support the credit markets. The Fed restated its intention to buy large quantities of mortgage-related debt to lower rates on home loans, a plan it first mentioned more than three weeks ago.

The program to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae [FNM 0.73 --- UNCH (0) ] and Freddie Mac [FRE 0.72 --- UNCH (0) ] already has helped pushed mortgage rates down.

The Fed, however, remained cautious about another unusual measure, which Bernanke first floated two weeks ago. The statement said the central bank was still "considering" buying long-term Treasury securities, which is also thought to be aimed at lowering borrowing costs by going around commercial banks.

By boosting the quantity of money in the financial system, the Fed has engaged in so-called "quantitative easing" to provide economic relief. The Fed's balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system.

The Fed's unusual decision to establish a target range for the federal funds rate rather than a set level is a clear response to recent market conditions where the rate has actually traded well below the desired target.

The Fed is "acknowledging that", Bob Doll of BlackRock told CNBC. In recent days, the rate has been solidly below 0.25 percent. In an accompanying statement, the Fed signaled its intentions by saying circumstances "warrant" keeping interest rates low for "some time."
The Fed empoyed a similar telegraphing approach during the 2003 period when there were worries about inflation. That successfully managed the market's expectations.

Doll says the Fed is trying to get investors to buy a broader range of debt products than Treasuries, which have benefitted from an enormous flight to safety in recent months.

If successful, investors will move to government agency securities and then corporate bonds, which market strategists say is a necessary precondition to any sustainable improvement in stock prices.