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The Federal Reserve is expected to aggressively lower
interest rates in its intensified battle against the credit crisis and
spreading economic weakness. The question is whether all of the effort
will turn the tide.
Federal Reserve Chairman Ben Bernanke and his colleagues have already
been working overtime, employing a variety of novel approaches to keep
the economy out of a recession or at least moderate the impact of any
downturn.
Treasury Secretary Henry Paulson made the rounds of the morning TV
shows Tuesday to underscore the administration's commitment to keeping
turmoil in the financial markets from worsening a struggling economy.
"The priority we have is a stable, orderly financial markets," he said
on CBS' "The Early Show. "This is very important to the health of our
economy and it's very important to the American people because access
to credit is key to businesses that need to invest to create jobs, its
key to families that need to borrow to finance a home or for college
education."
He said the focus of policymakers "is reducing the spillover into the
real economy from the turbulence and disruptions in our financial
markets."
To those who would complain that the administration is more interested
in bailing out Wall Street than struggling homeowners, Paulson said the
thousands of Bear Stearns employees likely to lose their jobs and life
savings, and thousands of shareholders who have lost billions because
of the company's collapse, probably do not feel like they have been
bailed out.
More relief is expected Tuesday when the central bank is expected to
cut a key interest rate by between one-half and a full percentage point.
"There is no reason for the Fed not to be aggressive," said Mark Zandi,
chief economist at Moody's Economy.com. "The economy is in a recession,
the financial system is in disarray and inflation is low."
The Fed's target for the federal funds rate, the interest that banks
charge each other on overnight loans, currently stands at 3 percent,
down from 4.25 percent at the beginning of this year. That was before
global market turmoil in January prompted an emergency
three-quarter-point cut on Jan. 22 and a half-point move eight days
later, the biggest reductions in a single month in more than a
quarter-century.
Many economists believe the Fed will deliver another
three-quarter-point cut or perhaps even a full one-point reduction at
Tuesday's meetings because Fed officials will not want to disappoint
fragile financial markets, which have been on a rollercoaster ride in
recent days as they have watched Bear Stearns Cos., the nation's fifth
largest investment house, suddenly be brought down by the equivalent of
a run on the bank.
JPMorgan Chase & Co. stepped in to announce it was purchasing Bear
Stearns at a fire-sale price on Sunday in a deal helped along with a
pledge that the Fed would supply a $30 billion (euro19 billion) line of
credit to back up Bear Stearns' assets.
That offer over the weekend was the latest move by a central bank that
has been pulling out all of the stops, including using Depression-era
procedures, to pump cash into the financial system. Analysts, who
faulted Bernanke for being slow to recognize the gravity of the
situation last year, now give him high praise for bringing all the
Fed's powers to bear.
"The Fed is doing what it can to come to rescue an economy that faces
potentially a huge meltdown in financial markets," said Lyle Gramley, a
former Fed governor and now an analyst with Stanford Financial Group.
"The Fed is acting as a lender of last resort and being very aggressive
and innovative."
In addition to providing support for the Bear Stearns sale, the Fed
also announced Sunday one of the broadest expansions of its lending
authority since the 1930s, saying it would allow securities dealers for
at least the next six months to borrow directly from the Fed. That
privilege, until now, had been confined to commercial banks.
At the same time, the Fed announced it was cutting the interest rate on
those direct loans from the Fed, through a facility known as the Fed's
discount window, by a quarter-point to 3.25 percent.
In other moves, the Fed last week announced that it would lend up to
$200 billion (euro126.82 billion) of Treasury securities that it owns
to investment banks starting March 27 for a period of up to 28 days in
return for a like amount of the investment banks' shunned
mortgage-backed securities. The Fed also announced recently that it was
boosting the size of special loans it has been making since December to
commercial banks.
The scale of these actions underscored the threat facing the economy
from a severe credit squeeze that began with a wave of defaults on
subprime mortgages last year but has now spread to other parts of the
credit markets, triggering multibillion-dollar losses by some of the
country's largest financial institutions.
Analysts said it will take some time to determine whether the Fed has
done enough to stem the wave of panic among investors.
The rapid decline of Bear Stearns stock - which had a market value of
about $20 billion in January, only to collapse to a sales price
of $2 per share, or about $236 million, this past weekend - has given
investors the chills.
"The Fed is trying very hard to figure out how to calm the markets
down, but so far it hasn't been very successful," said David Wyss,
chief economist at Standard & Poor's in New York. "Markets are
worried that there might be another Bear Stearns out there.".
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