With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

September inflation data indicated that consumer prices declined 1.3% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.5% — well within the Federal Reserve’s comfort range of between 1%-2%.

It appears its benchmark federal funds rate will remain virtually at zero for some time as the "economic activity is likely to remain weak for a time," according to the FOMC.

"The one consistent theme with all the Fed speakers is that they’re not going to raise rates any time soon," Drew Matus, an economist at Bank of America-Merrill Lynch, was quoted on NYTimes.com. "That is the one consistent theme that gets hammered home time and again."

In a unanimous vote, the FOMC decided to keep its key rate unchanged in a range of zero to 0.25 percent.

The released Fed statement follows in its entirety:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

To provide support to mortgage lending and housing markets, the Fed noted that it expects to finish purchases of "$1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt" in a slowing pace until the first quarter of 2010.

August inflation data showed that consumer prices had decreased 1.5% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.4%. That was the smallest year-over-year gain since February 2004, and well within the Federal Reserve’s traditional comfort zone of between 1%-2%.

However, with the massive Fed injection of money into the markets to stimulate the economy, the fear of approaching inflation is a concern for many.

"The Fed has printed a lot of money and unless Milton Friedman was wrong, when you print money inflation is going to be a problem," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala., in reference to the late Nobel Prize-winning economist and free market champion.

The Fed doubled the size of its balance sheet to more than $2 trillion.

An overview of the two-day meeting is provided in the following video report by Conway Gittens from Reuters.

In addition, the released FOMC statement follows in its entirety:

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

In a statement following the conclusion of its two-day policy meeting, the Federal Open Market Committee (FOMC) said it would:

• Increase its purchases of mortgage-backed securities by $750 billion, on top of the already announced $500 billion
• Buy $300 billion of long-term Treasurys over the next six months

The Fed hopes the first measure will pull down mortgage rates and the second will help ease the credit crunch. Immediately following the news, U.S. stocks rallied, bond prices surged and gold prices reversed direction.

"The Fed is printing money to buy government debt, Tom Hartmann, a commodity analyst at AltaVest Worldwide Trading Inc. in Mission Viejo, California, was quoted on Bloomberg. "This stokes fears of inflation again — why we’re seeing gold take off."

The Federal Reserve slashed its benchmark interest rate to between 0% and 0.25% in December, and decided to maintain the same range.

The following FOMC statement was released:

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession. 

Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. 

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. 

The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. 

Also in the news on Wednesday, the Labor Department reported an increase in inflation with consumer prices rising 0.4% in February.

The committee also noted their outlook had significant "downside risks," and provided a set of informal long-term economic projections, including that of inflation at 1.7% to 2%. After the meeting, the FOMC held the federal funds rate to a range of between 0 to 0.25%, as it first set in December, and concluded low interest rate levels would need to be kept for some time.

The released minutes make it clearer, however, how some members see the potential for excessive disinflation in 2009, or a deflation risk as St. Louis Fed’s Bullard addressed in a speech Tuesday. Deflation is a persistent decrease in general prices, or the opposite of inflation.

"Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation."

On the flip side, some members noted a risk that inflation could go the other way.

"Some [committee members] noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve’s liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve."

The minutes also revealed forecasts and long-term economic projections by Federal Reserve Governors and Reserve Bank presidents. Notable "informal" central tendency figures follow:

January Economic Projections:

In contrast, the projections made in October were less pessimistic (long-term figures not reported).

October Economic Projections:

FOMC’s next scheduled meeting is set for March 17-18.

At the conclusion of its historic meeting, the Federal Open Market Committee (FOMC) slashed rates to a record low of between zero and 0.25%. The minutes, which provide much more detail and are always released several weeks after the official meeting, cite specific expectations reaching into 2009 and 2010.

Perhaps most telling is the following statements within the minutes:

"Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting."

In terms of the direction for inflation, Fed forecasts show continual declines.

"The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010."

Some members in the meeting noted that current conditions could improve consumer savings, but that fact could also result in a deepened economic drag.

"Many participants noted that the decline in household wealth resulting from large drops in equity and house prices, together with tighter credit conditions, rapidly increasing unemployment, and deteriorating consumer sentiment, was contributing to a sharp contraction in consumer spending. Some participants pointed out that reduced consumer wealth and concerns about employment could lead to a further increase in saving, which, although desirable in the longer term, could put additional downward pressure on consumer spending in coming quarters."

The minutes also indicate global demand for U.S. products is not expected to improve near term, but the global economic slump should help keep energy prices lower, and improve consumer income and spending.

"Meeting participants noted that economic conditions had deteriorated substantially in recent months in both advanced and emerging market economies. As a consequence, demand for U.S. exports had weakened, held back also by the strengthening of the dollar since the summer. Going forward, global demand was expected to remain weak, and thus growth in exports was unlikely to provide much support for U.S. activity. However, the weakness in the global economy was contributing to lower prices of energy and other commodities, which should boost real incomes and provide modest support to household spending."

The FOMC’s next scheduled meeting is set for January 27-28.

Slashing the overnight lending rate by such a degree was an unexpected Fed move. Most everyone had expected a 0.5% cut from its prior 1%. The rate is now at its lowest level since the government started keeping records in 1954.

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

The announcement was made by the Federal Open Market Committee (FOMC), who released the following statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. 

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. 

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 warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. (Unanimous.)

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines, credit cards and many business loans.

Low rates can feed inflation, which the U.S. was battling in July when inflation had grown at its fastest pace in 17 years. However, with drastically falling energy prices, inflationary pressures have greatly eased with consumer prices falling a record 1.7%, according to Tuesday’s report by the Labor Department.

The FOMC’s next scheduled meeting is set for January 27-28.

Plummeting energy prices have taken the sting out of inflation since crude prices tumbled off their record peak near $147 per barrel in July — also when inflation was at its highest for the year. New York crude-oil for January delivery settled to $46.28 a barrel, falling $1.70 on Friday.

Consumer prices dropped a record 1% in October. The Labor Department reports on Tuesday the November CPI, which is the most watched government inflation barometer. Economists expect another record decline to 1.4%. Add in Friday’s report by the government showing producer prices fell to 2.2% and the Fed has an enormous green light to lower rates with little regard for inflation.

Falling prices is generally great news for consumers, but only to a certain point. If prices head for deflationary levels that hit below the cost to produce goods, further economic turmoil can ensue with production cuts, payroll reductions and deepening unemployment.

The Federal Open Market Committee (FOMC) meeting begins Monday and lasts through Tuesday until a rate decision announcement at around 2:15 p.m. (ET).

Rex Nutting of MarketWatch wrote the following about expectations of a 0.5% cut:

"No one thinks the rate cut will do much good in the current environment of fear and risk aversion. Households and businesses aren’t borrowing because interest rates are too high; they aren’t borrowing because they are afraid the recession will worsen, and because they can’t get a loan from banks that are even more afraid than they are."

At the end of its last meeting on October 29, the Fed cut interest rates to 1%, which was the lowest rate since 2004. That followed an emergency 1/2 percent interest rate cut on October 8.

Reuters "All eyes on the Fed" video reports on several of key data reports for the week. (Disregard the portion where it inaccurately says the Fed will announce any cut decision on Wednesday, as the announcement is expected Tuesday.)

The Producer Price Index (PPI), which measures prices at the factory door and inflation pressures before they reach the consumer, fell steeper than expected to 2.2%. Economists had pegged a predictive 2.0% rise. The index registered its biggest monthly decline ever in October, falling a record 2.8%.

Plummeting energy prices again led the way in dragging prices down. The energy index fell 11.2% after a 12.8% drop in the previous month which set a 22-year record. Crude goods declined 12.5% following a 18.6% drop in October.

The consecutive declines further highlights free-falling crude-oil prices, which closed Thursday in New York at $47.98 a barrel — a far distance from its record highs near $147 per barrel in July when inflation peaked.

"The immediate problem now is recession, not inflation," Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, was quoted at Bloomberg. "We’re seeing commodity prices continue to collapse."

The core PPI, which strips out volatile food and energy prices, rose 0.1%. The increase was in line with most forecasts and follows October’s 0.4% increase.

"Core PPI is a little bit of a surprise, but it’s still pointing towards a deflationary environment, the likes of which we haven’t seen in ages," said Peter Kenny, managing director at Knight Equity Management in Jersey City, New Jersey.

Some economists are becoming more concerned with the potential for deflation or continual falling prices, which is essentially opposite of inflation. While barometers have not reached deflation levels, should prices continue to drop and reach below the cost it takes to produce them, production cuts, payroll reductions and resulting rising unemployment can follow.

The Labor Department’s Consumer Price Index for November is scheduled for release Tuesday at 8:30 AM ET. Economists forecast the report to show a record 1.4% drop in consumer prices.

The Federal Reserve will also meet next week. The prospect of another cut in the key funds rate is greater with reduced pressures of inflation.

The Producer Price Index (PPI), which measures prices at the factory door and inflation pressures before they reach the consumer, plummeted 2.8%. Forecasters were expecting a 1.9% reduction, which would have itself broke the last record one-month drop of 1.6% in October 2001, or right after the September 11 terrorist attacks.

Similar to September’s 0.4 % fall, diving energy prices were the key to October’s PPI decline. Energy prices plunged 12.8% in the month after falling 2.9% in September. That marks the biggest one-month drop since July 1986.

Perhaps the best news for consumers was the 24.9% drop in gasoline prices, which fell 0.5% a month earlier. The decline comes as crude-oil prices marked a 22-month low Monday at $54.95 a barrel, far from its record high near $147 per barrel in July.

The so-called core PPI number, which excludes volatile food and energy prices, rose 0.4%. That was more than the 0.1% increase analysts expected and somewhat of a larger cloud in the outlook for future inflation.

The Labor Department’s scheduled consumer price report for October will occur Wednesday at 8:30 AM. With the overall PPI drop and an expected consumer price decline of 4.0% setting an improved deflationary tone, the Federal Reserve has more leeway to lower interest rates once again in an attempt to spur the economy.

The Fed cut its benchmark interest rate by a half-percentage point on October 8 and again on October 29 in response to deterioration in the global economy.

The latest rate is the lowest since 2004 and joins a new round of global cuts. China and Norway also cut rates on Wednesday, and other countries are expected to follow suite in an attempt to change the economic downturn and fight the ongoing crisis in the credit markets.

The Feds newest reduction follows on the heels of its emergency 1/2 percent interest rate cut on October 8 when world central banks first joined in their coordinated efforts to try to stabilize financial markets and ease out of the global credit crunch.

Today’s move was widely expected, although a minority of analysts suggested the Fed could cut rates by three-quarters of a percentage point to 0.75 percent, marking a never before seen low. Immediately following the announcement, U.S. stocks inched lower.

The announcement was made by the Federal Open Market Committee (FOMC), who released the following statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines, credit cards and many business loans. The Fed hopes to spur the economy with the lower rate.

Low rates can also feed inflation, which the U.S. was battling just in July when inflation had grown at its fastest pace in 17 years. However, with drastically falling energy and commodities prices, inflationary pressures have significantly weakened.

The need to spark credit easing has become the Federal Reserve’s main focus, even though inflation is still higher than the Fed’s optimal 1.5 percent to 2 percent comfort zone. Inflation pulled back to 4.9 percent in September and is expected to lower in October.

The FOMC’s next scheduled meeting is on December 16.