2008.12.1614:42:00UTC+00Fed Slashes Key Interest Rate To Between Zero and 0.25%

In an unprecedented move, the Federal Reserve established a target range for the federal funds rate from zero to one-quarter percent Tuesday, bringing it to its lowest level in over 50 years. The highly unusual move of establishing a range comes as U.S. policymakers face the most severe economic crisis since the Great Depression.

The Federal Reserve added that the funds rate is likely to remain exceptionally low for some time.

The Federal Open Market Committee "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," they said in a statement.

The reason for the target range rather than a set rate has to do with the fact that the funds rate has been trading well below its set target since the onset of the credit crunch in September. Setting a range rather than a set target allows the Federal Reserve policy to more accurately reflect conditions in financial markets.

Meanwhile, the FOMC warned that the already weak economy is likely to get worse.

"Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the statement read. "Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."

The federal funds rate has been cut 500 basis points since August of 2007, when the collapse of the housing and subprime mortgage markets touched off a ripple effect that has thrust the economy into its worst financial crisis since the Great Depression.

As the unemployment rate climbs and nervous Americans cut back on spending, a vicious cycle is taking hold that the Federal Reserve is working to shake.

While inflation has previously been a major source of concern for many members of the Federal Open Market Committee, the accompanying statement revealed that inflation pressures have "diminished appreciably" although there was no mention of deflation.

"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," the FOMC said.

Over the past few months, in an attempt to boost interbank lending and add liquidity to credit markets, the Fed has introduced a bevy of lending facilities. These lending facilities combined with the state of the economy have taken away from the impact of interest rate cuts.

Additional actions through lending facilities are likely to take place in the future, the Fed said. The FOMC is also "evaluating the potential benefits of purchasing longer-term Treasury securities," the statement read.

"The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," it said.

The vote to establish a funds rate with a range between 0 and 0.25 percent was unanimous.

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