Ben Bernanke pulled out all the stops and lowered the federal funds rate to the lowest rate in history signifying a target range of zero to .25 percent. The New York stock exchange reacted favorably to the annoucement.

Federal Funds Rate Cut

The Federal Funds Rate is the rate banks use when lending to each other. Bernanke kept the analysts off guard by this cut since they were expecting a less bold move setting the fed funds rate at .5 percent.

The language in the Fed statement is as follows,

“The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time….

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

All of this verbiage is clearly indicating Bernanke is as clueless as to how to stimulate the economy as Hank Paulson, the Treasury Secretary. The knee-jerk reaction is to flood the system with cash and hope that lending and borrowing will occur.The efficacy of this assumption is yet to be seen. However, if we look back at the Japanese meltdown of the late 1980’s and 1990’s, it didn’t work for them.

This particular rate cut will reflect in the short term interest rates used in credit cards and auto loans, but the mortgage rates will not be affected as other market forces move long-term lending.