The Fed is scared shitless.
Fed Aims to Prevent Panic With More Direct Borrowing
WSJ.COM
The Federal Reserve Board, aiming to alleviate the deepening crisis in financial markets, is expanding its reach as a lender and taking emergency action to encourage direct borrowing from the central bank through lower rates.
In an unprecedented Sunday night announcement that underscores the depth of the market fears, the Fed said it has created a new lending tool to help its network of primary dealers — securities firms that interact with the Fed daily but don?t fall under its direct banking supervision — provide financing in securitization markets. Growing worries about securities backed by mortgages are exacerbating the credit-market upheaval and threatening the overall economy.
The initiatives are "designed to bolster market liquidity and promote orderly market functioning." the Fed said in a statement. "Liquid, well-functioning markets are essential for the promotion of economic growth."
The Fed governors in Washington also approved a request by the Federal Reserve Bank of New York to lower the rate at which it lends directly to banks by a quarter percentage point to 3.25%. That narrows the gap between the discount rate and the federal funds rate, for overnight lending between banks, to a quarter point. It also extended the length of those direct loans to 90 days from 30 days.
The discount window is often seen as an emergency tool for banks to borrow from the Fed, which acts as the nation's lender of last resort. The central bank last August halved the spread between the discount rate and federal funds rate to encourage direct borrowing as the credit crisis flared. The 12 reserve banks around the nation, which make the direct loans to institutions in their regions, submit discount-rate requests to the governors in Washington for approval. The Fed was expected to lower the discount rate in lockstep with the federal funds rate after its policy meeting on Tuesday. Futures markets are expecting at least a half-percentage-point reduction in the federal funds rate, with some investors betting on as much as a one percentage point cut.
The Fed said the new lending facility, through the Federal Reserve Bank of New York, will be available Monday and remain in place for at least six months. The tool will allow the Fed's 20 primary dealers, which are involved with its daily money-market lending operations, to borrow directly from the central bank. Among those dealers is Bear Stearns, which spurred the latest market fears last week with its liquidity crisis and announced Sunday night its sale to J.P. Morgan Chase
Fed officials in recent months have been been especially worried about one set of market problems spurring others and reverberating through the economy through a "feedback loop." Fed Chairman Ben Bernanke, an expert on the Great Depression, pioneered research on how a crisis in financial markets can amplify a downturn.
"The Fed is pulling out all stops in an attempt to short-circuit the 'adverse feedback loop,'" Ray Stone of Stone & McCarthy Research Associates said Sunday night of the Fed's latest move. "Bernanke has written extensively about the feedback loops between the financial markets and the real side of the economy, which in part account for both the depth and duration of the Depression. … The Fed's bold actions of late reflect a 'risk-management approach' to policy, addressing the 'tail-risks' that were quite real during the Depression."
By making the announcement Sunday night instead of waiting until Monday morning, the Fed appears to have been trying to mitigate problems in overseas markets as a result of the U.S. crisis. A huge sell-off in foreign stock exchanges on January 21, a U.S. holiday, led Mr. Bernanke to call an emergency meeting of the Federal Open Market Committee to lower interest rates three-quarters of a percentage point just a week before a scheduled FOMC meeting. |
