Instead of establishing a new, specific primary interest rate, the central bank’s Federal Open Market Committee (FOMC) voted for a target range – 0.0% to 0.25% – a record low. Before yesterday’s cut, the Federal Funds target rate stood at 1.0%.

Instead of addressing the reason for its peculiar target range, the Federal Reserve opted for canned doomsday language that could have appeared verbatim in any of its previous rate cut announcements: It hasn’t been good. It doesn’t look good. And we’re trying to fix it.

Most cryptically, the FOMC said it “will employ all available tools” to promote economic growth and price stability. But those objectives could take some time to achieve.

“The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Fed said in a statement.

U.S. stocks soared on the Fed announcement, with the Dow Jones Industrial Average gaining 359.61 points, an increase of 4.2%, to close at 8,924.14. The Standard & Poor’s 500 Index jumped 44.61 points, or 5.14%, to finish the day at 913.18. The tech-laden Nasdaq Composite Index jumped 5.41%.

Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range, hoping it would encourage bank-to-bank lending, as well as bank-to-consumer lending.

“It’s a highly unorthodox and creative step,” Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon Corp. (BK), told Reuters. “We think it’s the best possible move for the U.S. consumer and for the financial market.”

The rate cut announcement dropped onto a cushion of ugly headlines from earlier in the day:

• Consumer prices posted their biggest plunge in 76 years. The U.S. consumer price index (CPI) fell by a seasonally adjusted 1.7%, lead by a 17% decline in energy prices, the Labor Department reported. On a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since 1932, three years into the Great Depression.
• Yields for 30-year Treasuries fell to an all-time low, Bloomberg News reported.
• Goldman Sachs Group Inc. (GS) reported a loss of $2.12 billion, or $4.97 a share, for its fiscal fourth quarter.
• New building permits and new housing starts hit a record low in November, as permits plummeted 15.6% to 616,000 units from 730,000 in October. Housing starts fell 18.9% to 625,000 from 771,000 in October, Reuters reported.

Joel Naroff, president and chief economist of Naroff Economic Advisors, doesn’t expect the rate cut to do much because banks simply don’t want to lend.

“There is little belief that will do anything as the issue is not the level of rates but the willingness to lend.  It may put a little more pressure on other central banks to ease, especially the Europeans,” Naroff wrote in a note to clients. “But other than that and the reduction in some variable-rate loans tied to the prime, the rate cut will not accomplish a whole lot.”

He added: “With the rate near zero, the Fed is basically out of bullets when it comes to the rate cut weapon so we will see what they say about using other mechanisms to add liquidity.”

Money Morning contributing editor Martin Hutchinson said in a recent column that the Fed’s rate cuts – combined with the government’s $700 billion bailout – will push so much money into the financial system that the final result will be widespread inflation – which is essentially an open invitation to profit from gold.

What Else Can the Fed Do?

With little to no room left to cut rates, Fed Chairman Ben S. Bernanke has signaled that he may employ unconventional ways to restore balance to the U.S. financial system.

The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets.

Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases. Experts say that, at some point, these stimuli must take hold, but that’s not necessarily true.

Many of Bernanke’s plans may be an afterthought on Jan. 20, when President-elect Barack Obama takes office with a different economic team and agenda.

New York Federal Reserve Bank President Timothy F. Geithner will be the new administration’s U.S. Treasury secretary, a role that will give Geithner the reins to what’s left of the Bush administration’s $700 billion bailout.

Former Treasury chief Lawrence Summers will head Obama’s National Economic Council. Analysts say this appointment puts Summers in line to succeed Ben S. Bernanke as chairman of the U.S. Federal Reserve in 2010.

New Mexico Gov. Bill Richardson will take over the Commerce Department, and Congressional Budget Office Director Peter Orszag will head the Office of Management and Budget.

Source: Fed Slashes Interest Rates to a 0.0% to 0.25% Target Range … But Now What?

Since the Euro-region slipped into a recession in October, the ECB has cut its main interest rate by 175 basis points to 2.5%. However, the bank’s policymakers, led by ECB President Jean-Claude Trichet, are now sounding calls for more fiscal discipline.

Investors are betting that the ECB will be forced to shave another 50 basis points off its benchmark rate in January, but ECB council member Axel Weber warned last week that the bank “would like to avoid” taking it below that level.

“We should be cautious when our rates approach territory we haven’t explored before,” Weber told Bloomberg News. “Our lowest level so far was 2.0%.”

ECB President Trichet told The Financial Times today (Monday) that there was “a degree of excessive pessimism” when the bursting of the dot-com bubble drove central banks to slash benchmark borrowing costs. Many analysts believe those excessively low lending rates fueled the asset bubbles of the past decade, including the massive run-up in real estate prices whose subsequent collapse helped trigger the current global downturn.

Trichet added that policymakers had a duty “to eliminate as completely as possible all the inbuilt elements in global finance that are amplifying booms and busts.”

ECB Executive Board member Juergen Stark said Dec. 10 that any room left for further rate reductions is “very limited, potentially allowing for small steps only.”

Of course, there are some analysts who believe the recent rhetoric coming from the ECB is just that.

“They will be forced to go to 1.0% or lower by June,” Juergen Michels, chief Euro-region economist at Citigroup Inc. (C) in London told Bloomberg. “The rhetoric at the moment is to justify their forecasts, which are too optimistic.”

The ECB forecasts the greater European economy will contract by 0.5% in 2009, before expanding by about 1.0% in 2010.

If the ECB’s estimates are too generous, the European central bank could again be forced to backtrack on its policy mandates. The ECB actually raised its benchmark rate to 4.25% in July, with policymakers expressing concern that “price and wage-setting behavior could add to inflationary pressures.”

The bank reversed course just four months later in October, cutting its rate by half a point on Oct. 8.

“The ECB should refrain from considering any pause in the easing cycle to avoid falling again behind the curve,” Marco Valli, an economist at UniCredit SpA in Milan, told Bloomberg.

Source: ECB Strikes Hawkish Tone on Interest Rates as U.S. Fed Plans Further Cuts

The New York-based AIG will get $40 billion of new capital from the U.S. Treasury Department’s $700 billion bailout package, to help offset the damage wreaked by four consecutive quarterly losses, including a third-quarter deficit of $24.5 billion that the company announced yesterday (Monday), Bloomberg News reported. The U.S. Federal Reserve also is slashing an $85 billion loan to $60 billion, and is replacing a separate $37.8 billion loan to the insurance company with $52.5 billion in aid.

These actions were taken by the Treasury Department and the Fed after it became clear that the original deal would never save the foundering insurer. In total, AIG is receiving more than $150 billion in aid, the most ever provided to a private-sector company in the United States. Even so, Fed officials said they believed that taxpayers would be repaid.

The reason: The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions will be placed on executive compensation at the firm, Forbes.com said.

U.S. taxpayers are assuming the additional risk in order to provide new AIG Chief Executive Officer Edward M. Liddy more time to salvage AIG. The insurer, which turned to the government in lieu of the bankruptcy courts in September, had planned to repay the original $85 billion loan package by selling some of its business units. But that plan stalled as the financial crisis hacked away at the value of these businesses, even as it hamstrung potential suitors by causing the credit markets to freeze up.

As AIG leaders looked for a way around that problem, the company continued to lose money. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004, Bloomberg reported.

“It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it,” Liddy said in a Bloomberg Television interview yesterday. “I started really about a week after I got here trying to renegotiate.”

Although most media reports attribute AIG’s predicament to the collapse of portions of the U.S. mortgage market, Money Morning Contributing Editor Shah Gilani – a national expert on the credit crisis – wrote in a recent investigative series that what really imploded the venerable insurance giant was an accumulation of misplaced bets on so-called “credit default swaps.”

And in the current economic environment, that problem will only get worse, Gilani said in an interview over the weekend, as reports circulated that a new deal was coming.

“AIG’s continuing problems are nothing short of extensive losses on mark-to-mark accounting of its ill-conceived foray into credit default swaps,” Gilani said. And that situation “will only get exponentially and catastrophically worse as the economy falters and reference companies it wrote swap insurance contracts on actually default, turning AIG’s unrealized losses, the subject of its margin calls, into realized losses for the full amount of its liabilities.”

Gilani isn’t surprised that the government had to restructure the AIG bailout package. Nor is he surprised that no real suitors emerged for AIG business units, several of which are actually superb businesses.

“The pieces of AIG that are desirable, and there are several very profitable divisions, are not getting serious consideration because potential acquirers’ stock prices are in the tank and there’s no inherent value in [the potential suitors’] stock prices as equity capital,” Gilani said. “There’s no one riding to the rescue because the horses are in the barn and the barn is burning.”

The U.S. reversed its opposition to an AIG bailout when the Fed realized that the potential ripple effects of a complete collapse could cause other firms to collapse, as well. The original $85 billion loan was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. (OTC: LEHMQ) was permitted to collapse. AIG got an additional $37.8 billion credit line to shore up its securities-lending program on Oct. 8, and on Oct. 30 received an additional $20.9 billion as part of the central bank’s commercial paper program, which was designed to unfreeze the short-term debt markets.

Source: Federal Government Grants AIG a New Bailout Package

What was Mr Brown expecting? He’s run the country into the ground and people are showing their disapproval at the polling stations.

After screwing up the banking sector and making many, many people’s financial situation worse… the country has stood up together with Paddy Chayefsky like exuberance and stated: “I’m as mad as hell… and I’m not going to take it anymore”.

The country’s mad, we’re mad, the finance sector’s crippled – what can be done?

Well consider this…

The finance sector makes up one third of our economic output, contributes £20 billion to the trade balance… and accounted for nearly HALF of UK GDP growth in 2007.

There are now more finance sector workers in Britain than there are construction workers, farmers and factory workers combined.

And they are in trouble!

Let me ask you something dear reader…

What do you think’s going to happen to the domestic economy… and to YOUR savings and investments… if Britain’s ‘Miracle Money Machine’ has its output slashed by one tenth… one third… or even half?

Well – as the pound continues to perform disastrously against the Euro and the dollar… investment banks brace themselves for further fallout… it’s time to batten down the hatches, because you’re about to find out.

Below you’ll find the link to a brand new Crisis Report published by The Fleet Street Letter. They’ve also identified three stocks poised to benefit from the finance sector-led recession they believe has to kick off in 2008.

Click here to read the Crisis Report

Not only is the most dramatic asset bubble of modern times clearly over… not only are the recent falls in real estate and equities just a taste of what’s to come… but a sector that accounts for nearly one third of Britain’s entire economy is about to get hammered!

If City activity dries up, so does growth, says Damian Reece in The Daily Telegraph. “The entire southeast, from house prices to employment, is a geared play on global financial markets.”

According to its analysts this could be one of the biggest challenges to face the British economy in The Fleet Street Letter’s entire 70-year history.

And it’s hurtling towards your savings and investments like a freight train even as you read this.

And if you’re not ready yet, you’ll want to be soon.

The Fleet Street Letter has been helping its readers prepare their portfolios for the coming crisis since October 2005.

With the situation deteriorating daily, they’ve decided to issue some advice to you today.

Specifically, the team have identified three “gloom loving” stocks they believe will thrive during the finance sector-led recession.

This could be the most important investment advice you read this year.

Click here for the full briefing

Regards,

Rob Mackrill
The Daily Reckoning

P.S. If like 75% of the country you’re fed up with the way Labour are running the country into the ground… you may as well take the chance to make a little bit of money on the back of their ineptitude (it’s something that makes me feel a little better anyway). So give our report a read – you will not be disappointed…

Go here for the full report