Fed cuts rate to virtual zero, Europe braces for recession

---

WASHINGTON, Dec 17 (AFP): The US Federal Reserve slashed its key interest rate to virtually zero yesterday to counter deflation and a global financial crisis as European governments braced for deeper recession.
The central bank's Federal Open Market Committee lowered its target federal funds rate from 1.0 per cent, already at a historic low, to a range of zero to 0.25 per cent.
The rate action had been widely expected as the world's largest economy sinks deeper into a year-old recession and the worldwide credit crunch cripples advanced economies and slows emerging economies.
"Since the committee's last meeting (October), labour market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the Fed said after its unanimous decision.
"Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."
Additionally, the Fed said it would take other steps to stimulate lending and economic activity, including large purchases of mortgage securities to help unblock credit.
US stocks soared after the Fed action. The Dow Jones Industrial Average leapt 362.32 points (4.23 per cent) to 8,926.85 at the closing bell.
The Nasdaq jumped 81.55 points (5.41 per cent) to 1,589.89 and the Standard & Poor's 500 broad-market index vaulted 44.69 points (5.15 per cent) to a preliminary close of 913.26.
President George W Bush said in an interview that he had been forced to sacrifice free market principles to save the economy from "collapse."
"I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we're in a crisis now. I mean, this is-we're in a huge recession, but I don't want to make it even worse," Bush added on CNN.
The aggressive US rate cut came amid another day of troubling economic news, with inflation slowing and governments issuing dismal growth forecasts.
Consumer prices in the United States plunged a record 1.7 per cent in November from October, raising fears of deflation that were echoed in Britain and France, which both reported sharp drops in their 12-month inflation in November.
"This disinflation movement is very brutal," Nicolas Bouzou, head of Asteres, an economic consultancy, said in reference to the sharp slowdown in France's inflation which he blamed on falls in world commodity prices.
"The collapse has become clear," said the Kommersant business newspaper in Moscow, referring to an industrial output slump of 10.8 per cent in November from October. It was Russia's first industrial output decline since early 1999, in the wake of the 1998 financial crisis.
News from Russia's ex-Soviet neighbour Ukraine was even more alarming.
Ukrainian President Viktor Yushchenko said economic contraction in the first quarter of 2009 could be as high as 10 per cent following a crisis in the banking system and a slump in demand for steel, Ukraine's main export.
In Europe's biggest economy, Germany, the Frankfurter Allgemeine Zeitung newspaper quoted a government memo saying contraction in 2009 could be three per cent or more, which would be the worst recession in Germany's post-war history.