October 7, 2008
Fed Steps in With Cash to Calm Markets
By Sue Kirchhoff and Barbara Hagenbaugh
WASHINGTON -- The Federal Reserve and the Treasury Department struggled to ease severe credit pressures Monday that threatened to bring down the global economy, including doubling to $900 billion the amount of cash available to banks through a Fed lending program.
Investors in a market in which participants bet on future Fed moves Monday were pricing in a half-percentage-point cut this month, according to Action Economics. That would reduce the Fed's target for short-term interest rates to 1.5%, the lowest in more than four years.
While a rate cut seems more likely, economists say it's unclear it would have much impact because a loss of confidence has led banks to stop lending, no matter the price. The Fed meets Oct. 28-29 but can cut rates any time.
"The underlying problem is not the federal funds rate," former St. Louis Fed president William Poole told reporters at a National Association for Business Economics meeting. "It is unwillingness of banks to lend. ... And I don't think a rate cut has much to do in solving that problem."
First Trust Advisors chief economist Brian Wesbury says, however, that cutting interest rates will help quell the panic.
"The market is pricing in the next Great Depression," he says, advocating a sharp rate cut to 1%. "You have to end the panic before anyone is willing to lend again."
Chicago Fed President Charles Evans in a Monday speech predicted a weak economy into 2009. Evans noted that energy and other commodity prices have fallen rapidly, a condition that could make Fed officials more comfortable about cutting rates. Still, Evans didn't give a clear signal. He called inflation "too high" and worried that "notoriously volatile" commodity prices could quickly rise.
Among the moves Monday, the Fed said it would:
- Raise its limit on 28-day and 84-day loans to banks to $150 billion each. That will increase the amount of loans under the program to $600 billion. The Fed will also increase the amount of cash it will make available to banks in November.
- Start paying interest on reserves that commercial banks hold at the Fed. That should make it easier for the central bank to manage interest rates, as banks will have an incentive to leave more money in reserves.
- Relax rules to give bank holding companies greater ability to buy assets from affiliated money market mutual funds. In recent weeks, shares in some funds have fallen below $1.
- Said it was working with Treasury to provide additional support for products such as commercial paper, short-term products for business funding.
The President's Working Group on Financial Markets, which includes officials from Treasury and the Fed, said it would move with "substantial force on a number of fronts." Treasury rushed to implement the $700 billion rescue plan, naming Treasury official Neel Kashkari to oversee the program (story, below) and laying out the first guidelines for asset sales. (c) Copyright 2008 USA TODAY, a division of Gannett Co. Inc.