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Wednesday, December 17, 2008

Breaking News: The Fed cut interest rate into 0% - 0.25% (range, not like usually)

The Federal Reserve voted today to lower the Federal Funds target rate 75 - 100 basis points to 0 - .25%. The move was a shock to the market which had anticipated just a 50 bps cut, and represents the lowest mark in history. The markets had climbed in morning trading on anticipation of the move.

Despite the Fed move, it’s unlikely there will be any affect on the actual rate, as banks were already lending to each other at rates close to zero last week.

The Fed Funds rate doesn’t actually set a number, rather it sets a target interest rate which fluctuates based on the availability of cash. Since the Fed has injected mounds of cash into the financial system of late, that number had already been next to zero recently, meaning this Fed move is cosmetic more than anything.

Ultimately, it signals that the Fed will continue to operate under a policy of buying up bad debt, injecting cash into the market and lending at rates a shade above zero.

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