Fed enters a ‘new era’

FED ENTERS A ‘NEW ERA’…. You know those signs that say, “Break glass in case of emergency”? This afternoon, the Fed broke the glass.

The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

Going further than analysts anticipated, the central bank cut its target for the overnight federal funds rate to a range of 0 to 0.25 percent, a record low, virtually bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation. The rate had previously been 1 percent, and a cut of a half-point had been widely expected.

The move, which affects the rate at which banks lend their reserves to one another, was to a large degree symbolic. Demand for interbank loans has been so low that the actual Fed funds rate has been far below the previous target for a month and hovered at barely 0.1 percent in the last several days.

This may seem like the last arrow in the Fed’s quiver, but the Fed’s Open Market Committee added that it will “employ all available tools” to promote economic growth.

The NYT added that today’s move “implicitly acknowledged that recession is more severe than officials had thought.”

You don’t say.

Update: Krugman adds, “Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too.”

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Steve Benen

Steve Benen is a producer at MSNBC's The Rachel Maddow Show. He was the principal contributor to the Washington Monthly's Political Animal blog from August 2008 until January 2012.