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Fed cut interest rate to nearly 0% to preserve banks

On Tuesday, December 16, 2008, the Federal Reserve cut a key interest rate to 0-0.25 percent to prevent a looming depression. In the history of its existence, the central bank has never before created a range for its benchmark rate. Analysts said the Fed’s decision not to set a hard target reflected its inability to dictate rates at a time when many banks have stopped lending altogether, while critics said the move was simply to guarantee the future existence of banks. Regardless, the U.S. weak economic conditions are expected to worsen as the nation’s credit crunch continue to halt construction projects, squeeze farmers, threaten college educations, bankrupt state governments, increase unemployment and foreclosures, and leave families searching for home financing.

This latest cut brings the Fed’s options in the traditional money policy arena nearly to an end. Monetary Policy is one of the most powerful tools the Fed uses to determine the size and rate of growth of money supply. The operation influence short-term interest rates and directly affects economic aggregates such as aggregates such as the total economic output, employment, inflation, and economic growth. Banks adopt the pattern the Fed set for the money they loan to businesses and citizens. Setting interest rates is considered by many economists as the primary way to control inflation and the rate of the Gross National Product (GNP).

Despite the economic crisis, consumer spending is up in dining out as well as retail sales. Black Friday was strong for retailers, and national numbers showed spending at nearly $10.5 billion.

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