Fed Sets Policy In A Range Between 0.00% And 0.25%

The Federal Reserve basically threw out its playbook and decided to keep the target rate within a range of 0.00% to 0.25%, essentially moving the target overnight rate to where effective overnight rates have been trading in recent weeks. The FOMC also made additional announcements regarding policy and liquidity.

First, the Fed moved to a conditional monetary policy on interest rates by saying it "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

Second, the FOMC acknowledged it can no longer stimulate the economy by lowering interest rates and is shifting its focus to a conditional quantitative easing policy.

The Fed will "support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level." The Central Bank will do this by purchasing "large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant."

Third, the Committee "is also evaluating the potential benefits of purchasing longer-term Treasury securities," in order to cap interest rates further out on the yield curve.

Fourth, "the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

The vote on today's action was unanimous. The FOMC also lowered the discount rate by 75 basis points to 0.50% and established a 0.25% rate on excess and required reserves. Previously, required reserves were not paid interest.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

TheLFB Risk Disclaimer can be found at http://www.thelfb-forex.com/content.aspx?id=174.

The Copying, Broadcast, Republication or Redistribution of TheLFB Content is Expressly Prohibited Without the Prior Written Consent of LFB Services, LLC.