By BW, Associated Press, and Action Economics staff
The Federal Reserve announced a series of steps Mar. 16 to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession: The central bank approved a cut to its lending rate to financial institutions, from 3.5% to 3.25%, and created another lending facility for big investment banks to secure short-term loans.
Global financial markets appeared to react with alarm on Sunday evening. In overseas trading, the euro made new highs vs. the dollar, U.S. Treasury futures fell, and gold futures posted new record highs at $1,009.50 per ounce. Japan's Nikkei 225 index plunged 3.4%, to its lowest level since August, 2005.
The steps 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."
Efforts to Improve Liquidity
The new lending facility will be available to financial institutions on Monday. The Federal Reserve Board voted unanimously to create the facility to improve the ability of primary dealers to provide financing to participants in securitization markets. It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25% and a range of collateral will be accepted to back the loans.
Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The Board also unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3.5% to 3.25%, effective immediately.
This step lowers the spread of the primary credit rate over the Federal Open Market Committee's target federal funds rate to one-quarter percentage point. The Board approved an increase in the maximum maturity of primary credit loans from 30 days to 90 days.
The Fed also approved the financing arrangement announced Sunday by JPMorgan Chase (JPM) and Bear Stearns (BSC).
Another Cut Likely
The Fed's actions are the latest in a recent string of unconventional steps to deal with a worsening credit crisis that has unhinged Wall Street. The action comes just two days before the central bank's scheduled meeting on Mar. 18, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.
The "discount" rate cut announced Sunday covers only short-term loans that financial institutions get directly from the Federal Reserve.
It will be in place for at least six months and may be extended as conditions warrant.