The Federal Reserve slashed its base lending rate Tuesday from 1.0 percent to virtually zero, saying its target federal funds rate would be a range of zero to 0.25 percent. The unprecedented low rate announced by the Federal Open Market Committee is aimed at fighting off deflation and a crippling global credit crunch. Additionally, the Fed said it would take other steps to stimulate lending and economic activity, including large purchases of mortgage securities to help unblock credit. “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 Fed said after its unanimous decision. “Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.” The central bank headed by Ben Bernanke said it would move “to 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 Fed said it would “purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets.” The FOMC “is also evaluating the potential benefits of purchasing longer-term Treasury securities” in an effort to bring down other lending rates to stimulate credit and economic growth. “The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity,” the statement said. US housing starts tumbled 18.9 percent in November from a month earlier to a new record low, down 47 percent from last year's level, in a sign that the troubled housing market has not yet hit bottom. US consumer prices plunged a record 1.7 percent in November, the second consecutive record-breaking decrease. Year-over-year inflation fell to just 1.1 percent from 3.7 percent a month ago. US regulators said on Tuesday they will raise premiums paid by banks for deposit insurance by 7 basis points, citing recent and projected bank failures depleting a reserve fund. “We do need to take this unfortunate step,” Federal Deposit Insurance Corp Chairman Sheila Bair said at a board meeting. The rate increases will go into effect on Jan. 1. FDIC staff said it expects the industry-funded reserve to drop to $28 billion in the first quarter of 2009 from $34.6 billion in the fourth quarter. After various expenses and investment income, the FDIC said the fund may end up at $29.1 billion in the first quarter. Banks will have to pay 7 cents more for every $100 in deposits, depending on the institution and its risk level, bringing premiums to between 12 cents and 50 cents. As part of the unanimous vote by the five-member FDIC board, the rule allows regulators to adjust the rates for the second quarter. Yields on some short-term Treasury bills became negative for the first time - meaning investors are willing to give up a bit of their capital for the safety of US government debt.
