No wonder the US Federal Reserve cut its key interest rate to its lowest level ever and promised to do everything to promote "resumption of sustainable growth" in the US economy after saying that the economic outlook confronting the US had "weakened further".
In fact the health of the US economy is worse than even the Fed had thought a few weeks ago and more figures this week confirmed that the economy is heading towards a very deep recession.
So it was no surprise the Fed adopted a range of 0% to 0.25%, which gives an effective rate cut of a minimum of 0.75% and up to 1%, according to the state of money markets.
It is going to help the Reserve Bank continue cutting rates here because the Fed’s move has taken pressure off the Aussie dollar and added it to the greenback.
The attitude of currency markets gives us the clue: the US dollar’s recent losses against the euro have accelerated and it is now down 11% since its peak on November 21: and its off more than 8% in the last three trading days.
The Aussie dollar clambered back over 70 US cents this morning in early Asian trading.
But for the moment America is in terrible shape.
No one else is lending, the economy is stranded on a shoal of debt and stricken by a crisis of confidence: something dramatic had to be done.
So for all intents and purposes the official cost of money in America will carry no interest cost. Market rates will exist, but even those look out of whack: the US 10 year bond yield hit an all time low of 2.13% overnight.
Here, our 10 year bond rate hit an all time low of 4.20% yesterday.
What the Fed is saying is that so dire are the current and future prospects for the US economy, that to stop them worsening further into perhaps a mild depression, it has been force to cut its key economic tool to zero cost.
And to further cushion the economy, the Fed also clearly stated that it would step up its purchases of a range of securities to help business of all types, households, homeowners, car owners and anyone who was having trouble getting credit or money.
In effect the Fed is now the ONLY funder of the entire US economy, and has supplanted the enfeebled banks who are so short of cash and confidence that they will lend to practically no one.
These are unchartered waters and apart from Japan in the 1990s no other major economy has been here before.
And there’s no parallel with Japan when it had interest at zero because it failed to use the situation to restructure its banks and companies and try and kick start the economy as the Fed is now starting to do.
The Fed is holding the economy together and hoping it won’t slide too further before the rumoured $US1 trillion stimulus package from the new Obama administration kicks in midway through 2009.
The Fed’s move will force central banks in Europe, Japan and the UK to look at lowering their key rates to 0%.
Here in Australia it should actually support the dollar and give the RBA room to cut further in February.
The rate cut, which pushes the federal funds rate to its lowest level since the Fed started targeting it, was larger than most economists had expected.
It could present problems for money market funds and for the repo market which has technical difficulties operating near zero rates.
With the actual federal funds rate consistently trading below the target rate, the actual fed funds will be around zero for months to come, perhaps all of 2009.
It was the 10th rate cut in 14 months, all of which have done nothing to stop the headlong plunge of the US economy into a very deep recession.
Money market rates for cash are now a fraction of even the 0.25%, being just above zero, so the new target range is a concession to the flood of liquidity in the US economy as banks and other investors maintain their reluctance to lend.
Rory Robertson of Macquarie Bank had this to say about the Fed’s move and statement.
"US headline CPI inflation will fall into negative territory in Q1, driven mainly by the dramatic fall in petrol prices.
"But US core inflation is falling too: while the latest year-to rate is 2.0%, the core CPI was pretty well flat over the latest three months.
"With US unemployment rising sharply and excess capacity growing fast, trend US wages and prices will remain under substantial downward pressure for the foreseeable future.
"The US policy rate at 0-0.25% now is lower than the 0.3% rate in Japan.
"Policy rates in the Euro-zone and the UK may end up in the same place by the end of 2009.
"With the global recession deepening, policy rates everywhere else – including Australia (see below) – will continue to drop until (local) unemployment stops rising.
"Short of "printing money and distributing it willy-nilly", the Fed obviously needs to do all it can to boost shrinking aggregate demand and counter growing deflationary forces.
"Unsurprisingly, the biggest paragraph in the statement confirmed the Fed’s ongoing focus on unconventional measures:
“The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.
“As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warran
