The US Federal Reserve slashed its target for overnight interest rates to a record low of 0-0.25 per cent. In a statement, the Fed stated that it would employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. It said weak economic conditions are likely to warrant exceptionally low levels of Federal funds rate for sometime.

In addition to the rate cut, the Fed said it was prepared to expand the already announced large purchases of debt issued by government-sponsored mortgage agencies to support the battered US housing market.

A briefing with a senior Fed official after the announcement today to explain this dramatic and historic change in the Fed Fund statement; the Fed official said this is not a quantitative easing although there are similarities with Japan. He said that Japan targeted the liability side of the balance sheet but the Fed targeted the asset side.

The fed is discussing about providing more information about the size of potential assets purchased but are not ready to take that decision yet. The Fed is not targeting spreads right now. 

The Fed sees some advantage in staying away from a 0% funds rate where it is more efficient it may appear to be in a range rather than at this point of time give in all the excess reserves that are out there rather than actually having a firm target. The Fed's decision depends on what assets to purchase on whether or not to purchase more of one thing, on how the overall housing and market situation develop.

So right now we are in this unclear decision making process by the Fed. One of the reasons it could be self defeating to announce a target or a mortgage or treasury rate is that the Fed doesn't know how much it would have to purchase in order to achieve the targets, so they will add money or asset purchases as needed.

Deflation is not now a major concern, the Fed was expecting a period of deflation. The Fed believes a bigger part of the spreads, the reason why the spreads are actually high is liquidity concerns which is why it feels it is justified in going in and buying these assets right now through this process.

It is a historic decision followed by an historic briefing by the Federal Reserve to explain as clearly as it can why the Fed is doing what it is doing. 

Henry Paulson, US Treasury Secretary said, ''What we have done today is stopped a string, cycle of financial institutional failures, which could have led to a downward spiral here and would be very dangerous for the economy. So working towards stabilisation and recovery is the key here. I don't think there is any key single action that we can take that's going to be a silver bullet and get us through this problem quickly. It's going to take a lot of work. We are all very fortunate that we have a Fed Reserve that's willing to do what is necessary to help us get through some very challenging and historic times here.''

Robert Doll , Vice Chairman and Global CIO Of Equities, BlackRock said, ''I think its part of the environment we are in. They (Fed) have had a 1% target and the fed funds have effectively been a lot lower than that. They are acknowledging that and are putting a zero at the bottom, which is appropriate in this environment.

William Gross, Chief Investment Officer and Founder, Pimco said, ''What would have happened had they not done what they have done? I think it would have been disastrous and near depression, in terms of a description. They have lowered interest rates by 500 bps now. They have provided liquidity to the markets, not just domestically but globally. They have produced a number of innovative programs. I think they have done very well.