At 1%, the Fed's benchmark rate matches its level from mid-2003 to mid-2004. Some economists have said that such a long time at such a low rate fueled the housing bubble that inevitably deflated and set off the mortgage meltdown that resulted in the current financial crisis.
In 2004 the Fed began slowly ratcheting the rate up until it crested at 5.25% in June 2006, as the housing market peaked.
In September 2007, as home-loan defaults mounted, the Fed began to lower the rate, slashing it in fairly steep increments until it reached 2% in April.
But the effect of the cuts was limited because the credit crunch was keeping banks in many cases from lending at any price.
So, instead of just opening the money spigot, the Fed broke new regulatory ground by targeting streams of cash at specific trouble spots.
Soon after the failure of Bear Stearns Cos. in March, the Fed began lending to investment banks as well as conventional banks. This month the central bank said it would start buying commercial paper -- short-term IOUs that companies issue to help finance daily operations.
But, though the credit markets are showing signs of thawing, the overall economy is increasingly causing concern. In response, the Fed, acting between its scheduled meetings, slashed its key rate by half a point on Oct. 8.
Wednesday's cut means the rate has dropped a full percentage point in less than a month.
Faucher of Moody's Economy.com said that keeping rates at such a low level could spur inflation over time, but would pose a concern only after the economy picked up again.
"Inflation is something that we should be worried about a year from now, but not right now," Faucher said.
In addition to lowering the target for its federal funds rate, the Fed dropped the rate it charges directly to banks. The so-called discount rate was lowered by half a percentage point as well, settling at 1.25%.
On the mortgage aid plan, FDIC spokesman Andrew Gray said the agency had had "productive conversations" with Treasury Department and other Bush administration officials. He said it was too early to speculate about the framework or size of such a potential program.
Treasury spokeswoman Jennifer Zuccarelli said the Bush administration was "looking at ways to reduce foreclosures, and that process is ongoing. We have not decided on a particular approach."
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jim.puzzanghera@latimes.com
