Federal Reserve slashes key rate, foresees weak economy 'for some time'

By The Associated Press

WASHINGTON - The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a financial crisis and prolonged recession.

The central bank said Tuesday it has reduced its target for the federal funds rate, the interest that banks charge each other on short-term loans, to a range of zero to 0.25 per cent.

That is down from the one per cent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 per cent.

Federal Reserve chairman Ben Bernanke and his colleagues also pledged to use "all available tools" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

The Fed made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

The Fed's decision was expected to be matched by a reduction in the commercial banks' prime lending rate, the benchmark for millions of business and consumer loans. Before the Fed announcement, prime was 4.0 per cent.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 per cent. The lowest target rate before this was one per cent, seen only once before in the past half-century.

Given how low interest rates are, the central bank said it plans to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.