World eyes all economic tools

By Mary Milliken

NEW YORK (Reuters) - The U.S. Federal Reserve took a radical step to revive the moribund economy, slashing its key interest rate to zero to 0.25 percent on Tuesday, shortly after plummeting consumer prices and record-low housing starts pointed to a prolonged recession.

Markets rallied on news of the larger-than-expected cut from 1 percent, which virtually exhausts the traditional Fed tools to battle the year-long recession.

The Fed, which said it would employ "all available tools," might take a page out of Japan's economic playbook. Japan's Central Bank signalled it could flood banks with zero-interest money for the second time in a decade. Japan might also see a rate cut this week, and in Europe, new data pointed to a possible cut next month.

U.S. stocks closed 5 percent higher after what one investor called the "extremely bold" Fed move. U.S. Treasury debt rallied sharply, pushing the benchmark note's yield down to five-decade lows, and the U.S. dollar tumbled versus the Euro and yen.

"It's a highly unorthodox and creative step," said Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon in New York. "We think it's the best possible move for the U.S. consumer and for the financial market."

The extent of the current turmoil was all too apparent when Wall Street titan Goldman Sachs Group posted its first quarterly loss since going public nine years ago.

But the fourth-quarter net loss of $2.12 billion (1.4 billion pounds) was less than the market feared and Goldman shares shot up more than 16 percent after losing 70 percent this year.

Another U.S. heavyweight, General Electric, also allayed fears of a catastrophic 2009 at the conglomerate with its announcement that profit at its industrial units would be flat to 5 percent higher. Shares rose nearly 6 percent.