American Interest Rates Hit Zero
17 December 2008
The Federal Reserve in America has dropped its interest rates to zero. Technically the rate now occupies a range between zero and 0.25 per cent, a decision which took many commentators by surprise. The markets had been expecting rates to settle at either 0.25 or 0.5 per cent.
Having rolled the dice, the Fed has little remaining leverage to control America's seemingly precipitous slide towards recession. The ongoing struggles of the country's "Big Three" car manufacturers have contributed to a growing sense of gloom Stateside, and the Fed's decision this morning takes American interest rates to their lowest levels in history.
A statement from the Reserve, issued as the decision was announced, highlighted the reasons behind this decision: "Since the Committee's last meeting, labour 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."
Some commentators have questioned what benefit the Fed's rate cut will bring to America's ailing economy, and much the same comments were levelled at the Bank of England when it cut interest rates to two per cent earlier this month. With mortgage rates almost completely de-coupled from headline interest rates, the biggest impact is likely to be felt by savers, whose interest-related earnings are falling markedly. It was also confirmed today that the BoE's Monetary Policy Committee discussed dropping rates below two per cent at their December meeting, before unanimously voting for a reduction of a full percent.