Fed: Bold Moves Won't Stop Economic Woes

Central Bank Fears Longterm Rut Despite Slashing Interest Rates And Vowing Other Radical Measures

(CBS/ AP)  Even as Federal Reserve officials slashed their key interest rate to a record low and pledged to use other unconventional tools to fight the worst financial crisis since the 1930s, they still feared the economy would be stuck in a painful rut for some time.

Documents released Tuesday provided insights into the Fed's historic decision to ratchet down its rate to near zero from 1 percent at its Dec. 15-16 meeting. In the first action of its kind in the Fed's 95-year history, Fed Chairman Ben Bernanke and his colleagues created a target range for its rate, putting it at zero to 0.25 percent.

Despite the aggressive action, "the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial," according to the Fed document.

In fact, Fed officials expected the economy would "contract sharply" in the final three months of 2008 and in "early 2009," the document said. Some participants suggested "the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome."

Against that backdrop, Fed officials last month signaled rates would stay at record low levels for a while in an effort to cushion the blows from a recession that started in December 2007.

The housing, credit and financial debacles have badly hurt the economy. Problems have fed on each other, a vicious cycle that Bernanke and other policymakers have been desperately working to break.

Unemployment bolted to a 15-year high of 6.7 percent in November and is expected to hit 7 percent in December when the government releases that report on Friday. The economy has lost nearly 2 million jobs since the recession started. And, the Dow Jones industrial plunged nearly 34 percent in 2008, the worst showing since 1931.

Meanwhile, pending U.S. home sales fell to the lowest level on record in November, as the plummeting stock market and faltering economy caused buyers to delay their purchases, the National Association of Realtors said Tuesday.

Vanishing jobs and shrinking nest eggs have forced consumers to cut back sharply, jolting the economy into reverse. Many believe the economy fell backward at a rate of 5 to 6 percent in the final quarter of last year and is still shrinking.

Most Fed officials believed that the benefits of keeping rates "close to, but slightly above zero probably outweighed the adverse effects." The Fed didn't discuss those adverse effects but they would include the potential for spurring inflation down the road.

Fed officials thought it was important to let investors know that rates "were likely to stay exceptionally low for some time" because it could lead to a much-desired drop in longer-term interest rates. To that end, shortly after the Fed's December decision, mortgage rates started dropping sharply. Rates on 30-year mortgages fell to 5.1 percent, the lowest on records dating back to 1971, Freddie Mac reported last week.

In discussing the best strategy on rates at the December meeting, some members wondered whether the Fed should not set a target for its key rate, which would focus attention on the Fed's other efforts to turn around the ailing economy. But other members thought that not announcing a targeted interest rate might confuse investors.

In the end, the Fed officials agreed to create the new range - from zero to 0.25 percent. Fed officials decided it would be preferable to "communicate explicitly that it wanted federal funds to trade at very low rates."

In terms of other tools to aid the economy, the Fed discussed the benefits of buying longer-term Treasury and other securities. Many officials also thought the Fed should consider whether expanding some of its existing programs to provide loans or to buy debt would be helpful or whether new programs should be created.

The Fed on Monday started buying mortgage-backed securities, part of a program announced in November to help bolster the crippled housing market.

Fed officials at the December meeting also discussed possible refinements to its economic projections. It didn't provide details. No decisions were made on that front.

[noloyalisti]

Mission Accomplished for the Republi CONS. Spend like drunken sailors to prop up the economy, then when the Dems come in to clean up the disaster, cry foul.

It happens again and again and here we are.

[lochlan-2009]

I love the picture. Equal to or less than .25%. So what is the interest rate? Any number in between their. Well, I want it at the 0% while I''m borrowing other peoples money, but the .25% when I''m lending their money to someone else.

This country is rotten straight through. 2009 is going to be one hell of a year. Thanks Bush and Co., for the largest heist in history.

[enriquecaliente]

I work for a Bank that didn''''t need money from the TARP since they stopped retail banking years ago. For all intents and purposes we''''re a financial services agency. Well they stated to us that they were forced to take $9 billion in TARP funds. They also are laying people off for two reasons, 1. They''''re off shoring jobs to India, which saves the company money. Getting rid of American workers, they pay the Indians 15k to do the job of people making 45 - 50k, no SS, or benefits to pay into. I would have thought that in this time of economic woe''''s that they''''d help the country by keeping jobs here. But NO. As far as I''''m concerned, if this is not tantamount to treason, then I don''''t know what is. This is one of the problems. 2. Now they sent out a memo welcoming the New Year and stating how we must work as a team, oh and by the way, there will be more lay-offs due to the economic down turn, and no merit raise''''s. But the CEO still fly''''s in a Lear Jet. I haven''''t heard one word about how all of senior management will take a pay cut or not accept bonus''''s. But they did mention that they''''ve cut back on travel and entertainment. Like that means anything to the rank and file. GREED and plenty of it lives.

[schoolmarm22]

Corporate greed and mismanagement have certainly taken their toll on our economy, but the NAFTA agreement sent countless jobs directly out of our country. Unless we stop the flow of industry to other countries, there will be even fewer jobs for Americans to obtain and hold.

[whitemale08]

What ''bold moves''?

All the Fed can do is print worthless Federal Reserve Notes!

You can call it TARP, TALF, or any other alphabet soup of programs and its the same thing.

You think these manufacturing countries and countries that ship us their raw material and oil resources can be fooled?

This is not just a ''typical downturn'' or ''business cycle'', this the total BREAKDOWN CRISIS of the entire British Empire called the ''GLOBALIZATION''!

The Quadrillions in worthless derivates which make up the entire financial system has COMPLETELY BLOWN OUT!

The same idiots that have given us understatements after understatements have either no idea or will not admit that the ''Minsky moment'' (when profit margins are so thin they are rendered unprofitable) has literaly happened to credit derivatives itself!

Imagine that folks!

Credit was actually commoditized around the world!

Now that there is no profit in credit, there is no reason to finance global trade under the current dead monetary system!

Unless we replace this system with a New Bretton Woods fixed-exchange-agreement, we will literaly go back to the horse and buggy perhaps the stone age!

[dinkydog1]

When will this recession end? When it decides to, plain and simple. To paraphrase McCain, the fundamentals of the economy are still in place.

Posted by ghostfighter at 08:02 AM : Jan 07, 2009

.............................................

Fundamentals of the economy are still in place? The US national debt (our mortgauge to China)is now close to exceeding the total net worth of every US citizen combined. We''ve ran trade imbalances for as long as anyone can remember. Our industrial base has been decimated by forien trade..................

You were being sircastic, right?

[exusmcsgt]

I''''m actually expanding my business right now, in fact. Great time to do it, there''s not much competition and labor is cheap.

Posted by ghostfighter at 08:02 AM : Jan 07, 2009

As am I. I rehab foreclosed homes.

[rickwar]

Take some Gloom, wrap it in Doom, package it as news and the herd believes it all.

Fact: More people are still at work than ever.
Fact: The majority of people are still making their payments and have jobs.
Fact: The vast majority of homeowners still are in their homes.
Fact: Fuel prices are down at the moment
Fact: Consumer goods are down at the moment
Fact: You haven''t lost a thing if you don''t own stock or if you haven''t sold it off in panic
Fact: Some businesses are still growing
Fact: There is still plenty of money to be made in the stock market at the bottom
Fact: Belt tightning only makes it worse
Fact: The industries and businesses taking the hit are the ones that usually take the hit when the economy cools.

Fact: Dumb *** and his crew will be gone from Washington in days, it will take years to clean up his mess, but at least he''ll be gone.

Spreading doom and gloom just makes it worse, it feeds on itself and can become self fullfilling.

[exusmcsgt]

Dubya''s life-long streak of tragicly mismanaging enterprises remains unbroken.

If we could only get him a job with al Qaeda, the WOT would be over in 6 months.....

[irmcvet971]

Have the Republican''s gotten us into a depression we can NOT get out of?

[rusure5]

The greedy bankers of the Fed, along with the Fascists and Zionists of the Bush regime, have routed the US economy.

It is guaranteed to get a lot worse, and there is nothing that anyone can do to prevent it at this point.

[ndg1979]

I think I have come up with a much better solution to this economic situation. The government is looking at spending as much as $800 billion to "turn this economy around" after Obama takes office. The public will only be getting $500 or $1,200 dollars each and not all at once either. Here is what to do - take a page from Obama''s book and find each person making less than $250,000 a year. As of 12:30am EST on Wed., Jan 7, 2009, the total estimated U.S. population was 305,567,259. Approximately 150 million of those comprise our national workforce and not all of them make less than $250,000 a year. With the average gross income in the U.S. totalling a mere $42,000 a year, I would give each of those eligible citizens a full $1 million tax free dollars. However, every dollar must be accounted for and the money cannot be used to buy alcoholic drinks, cigarettes, guns, drugs or other items deemed dangerous to human life. The money would be placed in banks in fee-free accounts specified for this purpose with a special debit card issued to the account. This would force a "ground up" approach to rebuilding since the money starts at the poorest level. I would then take $350 billion for much needed infrastructure improvements and investment in better use of that infrastructure (better cars, trains, new energy tech.) thereby setting us up for new economic growth over the long-term. Total cost thus far - approx. $351 billion or half the government''s projections.

[flsunjnky]

Looks like the Republicans have gone to bed...to wake up to a new administration hehe!

[stinginrich]

I thought at least william17/donnie/chester would have appreciated that joke at least, but,..*crickets*

[erasmus606]

Well, stinginrich , that was certainly in poor "taste"!

Posted by FLSunJnky at 11:49 PM : Jan 06, 2009

hahaha

[stinginrich]

Hahahaha, you just corrupted my INNOCENT eyes!

(do you believe that?):)




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Posted by erasmus606 at 11:52 PM : Jan 06, 2009
+ report abuse

Of course,....I imagine you''ve never heard such vulgarity....:0)

[erasmus606]

"Oh, no, it wasn''''t that, he was out in the middle of the street licking his Di*k and a Truck ran over him"..... :0)

Posted by stinginrich at 11:45 PM : Jan 06, 2009

Hahahaha, you just corrupted my INNOCENT eyes!

(do you believe that?):)

[stinginrich]

I''ll be here all week.....try the veal.....

[stinginrich]

Well, stinginrich , that was certainly in poor "taste"!


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Posted by FLSunJnky at 11:49 PM : Jan 06, 2009
+ report abuse

I guess she didn''t think it was funny.....this is a tough crowd tonight.....

[flsunjnky]

Well, stinginrich , that was certainly in poor "taste"!