Fed Cuts Rate to the Root

December 16, 2008 - 2:48PM

(bettertrades) - In a historic move, the Federal Reserve cut its target rate to a range of 0% to 0.25%. The move marked the first time in the central bank's history that the target rate was set in a range and not at a specific value.

The FOMC's statement highlighted sustained systemic risks saying, "Labor-markets have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined." On the heels of this morning's CPI report, the FOMC statement adds, "inflationary pressures have diminished appreciably. In light of the declines in prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in the coming quarters."

The Fed's crusade to inject liquidity into the financial system is charting new territory. With the target rate now hovering near zero (Negative real interest rates), the Fed is increasingly running out of ammunition. The intent of the Fed's decision was to effectively make Treasury securities unattractive in the coming months, hoping to shift massive flight to safety funds into corporate yields and equities.