The rate cut – which pushes the fed 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 is likely to be near zero in the months ahead.
The move came as deflation fears were intensified with the release of new figures showed the biggest monthly drop in US prices on record in November, with no increase in core prices excluding energy and food.
It also coincided with a warning from Barack Obama, president-elect, that the government would have to implement aggressive fiscal policies as the Fed ran out of room to reduce rates.