Fed Formalizes Existing Fact
This won't make much difference as the Fed had for weeks kept the effective Fed fund rate in that range since December 4. Judging by the rally in stocks, bonds and most commodities (except oil, for some unknown reason), and the sharp sell-off in the dollar, however, it appears to have a short-term psychological effect on traders unaware of the fact that the Fed had already lowered the effective rate to that level.
This effectively means that that the Fed has run out of ammo, in terms of lowering interest rates. But for those of you fear or hope for deflation, there is no need to worry or cheer on account of that. You see, they still have the form of ammunition known as quantitative easing available, which in effect means the ability to buy assets and paying for it through the printing press. And they are already suggesting that they will target the assets whose price are most depressed now.
And if you think Ben Bernanke will hesitate to expand the Fed balance sheet by whatever amount it takes to reignite inflation, think again. Inflation will therefore return.