The bad news add pressure on the Federal Reserve to cut its federal funds target rate.
Hence, the Fed entered the crisis with the Federal Funds target rate at 5.25 percent and the discount rate at 6.25 percent.
The Federal Reserve Board's cut in the target federal funds rate to 1% suggests they fear deflation, not stagflation, the worst scenario of all--what we had during 1982.
Another bad sign: The federal funds rate target of 4.75% remains higher than the yield on 10-year Treasurys.
Out of the 17 members, nine currently anticipate leaving the federal funds rate target unchanged until 2014 or 2015.
There is also the expectation that the FOMC will extend its zero to 0.25% federal funds rate target thought 2015.
The most obvious way for the Fed to help is to lower the federal funds rate target, which sets the cost of borrowing, from its level of 2%.
So, the FOMC reverted to its prior practice of controlling money through its target Federal Funds rate.
These reserve operations are done solely to maintain the target Federal Funds rate.
An abrupt end or substantial curtailment of QE2 is more likely to roil the financial markets and threaten renewed economic weakness that is a slight increase in the target Federal Funds rate.
When the target Federal Funds rate is raised to half a percentage point around June is my guess the discount rate will probably be raised by a half point rather than a quarter point.
"The SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run, " said the committee's minutes.
BBC: US Federal Reserve to publish interest rate projections
In particular, observers look for Fed officials to discuss what to do when the program known as Operation Twist ends, as well as to discuss setting numerical targets to signal how long policy-setters will keep the target federal funds rate at essentially zero.
FORBES: Deep Discussions But No Action Expected At Two-Day FOMC Meeting
When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.
In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures.
In the area of monetary policy, the Federal Open Market Committee (FOMC) has moved aggressively, cutting its target for the federal funds rate by a total of 225 basis points since September, including 125 basis points during January alone.
The target for federal funds rate, which is the rate banks charge each other to borrow funds overnight, is already near zero.
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Even at 4.0%, the rate is significantly below the 5.25% target on federal funds, the comparable American rate, which has been at that level for roughly a year.
In mid-August the Fed supplied enough liquidity to hold the effective federal funds rate, an overnight interbank rate, below its then target of 5.25%.
That means the Fed could reduce its federal funds target to or below the European rate, which would be a big negative for the dollar.
Many economists have been calling for the Fed to move to cut the target for the federal funds rate, which has been at 5.25 percent since June 2006.
The target for the federal-funds rate, at which banks lend to each other overnight, has been between zero and 0.25% since December 2008.
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Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate.
Neither will targeting the Federal Funds interest rate, no matter how the target is chosen.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.
The Federal Open Market Committee voted to keep its fed funds target rate unchanged at a range of zero to 0.25% Wednesday, but did acknowledge the improving economic environment.
The Fed cut its target on federal funds, the overnight interbank loans that form the floor rate for U.S. lending, to just 0.25%, down 75 basis points from the previous 1.0% level.
Trading in federal funds futures indicated an 84.0% chance that the central bank would cut its overnight rate target to 1.25% on Oct. 29, following its half-point reduction on Wednesday.
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