The Federal Open Market Committee (FOMC) cut the Fed Funds rate by 75-100 basis points to a target range of 0-0.25 percent this week and signaled to keep the interest rates at low levels for some time.

Going beyond 50 basis points surprised markets, and, overall, the accompanying statement was an aggressive one even though nothing new in terms of the unconventional measures was mentioned.

The US equity market rallied after the announcement with the Dow Jones Industrial Average finishing the day up 4.2 percent, while Treasuries also rallied with the 10-year Treasury yield down 17bp to end at 2.36 percent. The US dollar fell 2.5 percent against the euro and 1.8 percent versus the Japanese yen.

The statement did not differ much from the one that FOMC issued on Oct 29 in terms of the bleak economic growth outlook, saying that "the outlook for economic activity has weakened further".

In the inflation paragraph, the phrase "expects inflation to moderate further in coming quarters" no longer included the ending "to levels consistent with price stability." This could mean that some officials have started worrying about inflation falling below "levels consistent with price stability."

Comparing the phrase "policy accommodation can be maintained for a considerable period" in 2003, this time the Fed was saying "the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." The difference is that the earlier phrase was more of a time commitment, while this one is contingent on economic conditions.

The Fed officials also emphasized their commitment to "employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability", listing the unconventional measures that had been floated before - buying more agency debt and mortgage-backed security, considering the purchase of longer-term Treasuries and the Term Asset-Backed Securities Loan Facility (TALF).

The phrase "The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity" implies the Fed's intention to continue with aggressive easing policies even though easing through cutting rates is no longer an option.

The Fed is done with cutting interest rates and we are entering the realm of quantitative easing and aggressive fiscal stimulus.

The Fed's balance sheet has undergone a dramatic transformation over the past few months. The total amount of the Federal Reserve's bank credit has increased from $800 billion to $2.2 trillion (from 6 percent to 15 percent of GDP) given the Fed's various liquidity facilities, such as the Term Auction Facility and TALF, etc.

Despite the undergoing process of deleveraging, we do not see sustained deflation or an economic depression as the most likely outcome in 2009. The Great Depression in the 1930s was caused by the Fed tightening monetary policy into the downturn, which wreaked havoc.

In Japan, the central bank raised interest rates further in 1990/91, driving down monetary growth, which started to contract by the end of 1993.

These actions set the scene for falling property values and the banking crisis.

This time around, however, the Fed and other central banks have responded robustly and aggressively - moving to unorthodox measures within 15 months of the start of the crisis - compared to eight years in the case of Japan in the 1990s.

It seems so far that global policymakers have learnt from the mistakes made in the Great Depression in the 1930s and in Japan after the housing bubble burst in the 1990s. Although it is still unclear whether any of these unconventional measures will work, certainly central bankers are not repeating what was done in the 1930s.

The author is head of investor communications at JPMorgan Asset Management (www.jpmorganam.com.hk)

(HK Edition 12/19/2008 page2)