US Central Bank Cuts Short-term Interest Rates to Nearly Zero

Saying the economy is continuing to weaken, the U.S. central bank Tuesday cut short-term interest rates to nearly zero.

The Federal Reserve is taking short-term rates to their lowest level since the central bank was founded in 1913. It is cutting rates by three quarters of one percent to 0.25 percent. 

Following its two-day meeting, the 12 member policy making committee said the central bank will use all available tools to stimulate economic activity and combat the financial crisis. It was tenth cut in short-term rates in the past 12 months.

Bill Poole was until earlier this year a Federal Reserve governor. "The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding," he said.

In its statement, the Fed said that the economic outlook has weakened further since the committee's last meeting in late October. The U.S. economy has been in recession for one year. The gross domestic product expanded by a meager 0.5 percent annual rate in the three months ending in September.

And some analysts expect negative growth at a six percent annual rate in the current three-month quarter. The economy has lost nearly two million jobs in the past year and the recession is already the longest in 25 years. Some analysts worry that the downturn will be worst in the post-World War II period.

The global outlook is not much better as Japan and parts of Western Europe have entered recession. And growth in China-the fastest growing emerging economy is decelerating from the rapid 12 percent rate of earlier this year.

Analysts say the central bank's challenge is greatly compounded by the 15-month old credit squeeze that has essentially frozen some sectors of the credit markets. Thus, no matter how low interest rates are, creditors are reluctant to lend, while businesses and consumers are reluctant to borrow.

The stock market responded favorably to the news of the larger than expected rate cut. A rally that had seen the Dow industrials up 100 points quickly changed to a 200 point advance.