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Fed Cuts Short-Term Rates to Nearly Zero; Now What?

The U.S. central bank can follow a policy of easy money -- for now -- because inflation is no longer a concern. Transcript of radio broadcast:

This is the VOA Special English Economics Report.

The United States Federal Reserve says it will use "all available tools" to restart economic growth. The central bank's main interest rate is now the lowest in its history. This week the Fed cut its target rate of one percent for overnight loans between banks to a target range of zero to one-fourth of one percent. The Fed based its decision on weakening economic conditions.

Americans have decreased their spending every month since July -- the longest period in at least sixteen years. Unemployment grew to six and seven-tenths percent in November -- the highest in fifteen years.

This week's cut in the federal funds rate was larger than many economists had expected. The Fed also cut its rate for direct loans to banks. And it began paying interest on balances held in the Federal Reserve System.

In the past, cutting rates has been a powerful tool to lift the economy. But President-elect Barack Obama says it is not enough this time.

BARACK OBAMA: "We're running out of traditional ammunition that's used in a recession, which is to lower interest rates. They're getting to be as low as they can go."

Some economists think the United States could face a "lost decade" like Japan in the nineteen nineties. The Bank of Japan cut rates to zero but failed to avoid a long recession.

The Fed is also taking other steps. Last month, it announced a plan to buy up to six hundred billion dollars in housing-related debt. Since then, rates for home loans have fallen. The average rate for a thirty-year mortgage was five and nineteen one-hundredths percent this week. That is the lowest in at least thirty-seven years.

And next year, the Fed plans to lend up to two hundred billion dollars to support credit markets for car and student loans and small businesses.

For now, the bank is following a policy of easy money because there is little risk of inflation. For the last two months there were record decreases in the Consumer Price Index, which goes back to nineteen forty-seven.

Prices for goods and services were nearly unchanged in November except for a big drop in energy prices. Gasoline prices fell almost thirty percent.

So far, the Organization of Petroleum Exporting Countries has failed to halt the drop in oil prices. OPEC agreed Wednesday in Algiers to a record production cut of more than two million barrels a day, or about seven percent. Even so, oil traded below forty dollars a barrel this week for the first time in four years.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.