Fed takes new steps to ease crisis

Fed takes new steps to ease crisis

By JEANNINE AVERSA, AP Economics Writer 43 minutes ago

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WASHINGTON - Federal Reserve Chairman Ben Bernanke said new steps announced by the central bank Sunday should help squeezed financial institutions get cash infusions_ a fresh effort to provide relief to a spreading credit crisis that threatens to plunge the economy into recession.

The central bank approved a cut in its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

"These steps will provide financial institutions with greater assurance of access to funds," Bernanke told reporters in a brief conference call Sunday evening.

The new lending facility will be available to financial institutions on Monday.

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 percent and a range of collateral — including investment-grade mortgage backed securities — will be accepted to back the loans.

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."

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

Treasury Secretary Henry Paulson said he was pleased by Sunday's developments.

"Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets," he said.

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. And, the action comes just two days before the central bank's scheduled meeting on Tuesday, 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.

Even with the Fed's aggressive moves, economic and financial conditions keep deteriorating.

The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.

The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.


AP Business writers Joe Bel Bruno and Madlen Read contributed to the report from New York.

5 thoughts on “Fed takes new steps to ease crisis

  1. It would be nice to allow the market mechanism to operate on its own, but there are people who are stuffing their pockets. No surprises for guessing who. Suffice to say, history does repeat, wars only make certian people more wealthier, and wars are always followed by massive transfers of wealth.

  2. Looks like the us economy is in shambles and that its not over yet.There is talk about lehman brothers being next .One would have thought that the US would have overcome this after the abysmal writteoff reports that started from last summer.After the reports came the ceo changes and one would think that the new ceo's they would pin the worst results possible on their predecesor.But there is always a but ..and then then came the Bear thing!Furthermore it Looks like there is a direct correlation between the commodities pricing and the dollar ...with gold i understand it hedging etc...but with crude it looks like someone does not want to earn less on their barrel ..and since that someone is not just the arab producers i am led to conclude that the US dollar is way from maintaining its status as a reference currency! And if that is the case do we have a political issue being raised as to who is calling the worldwide shots?Just a string of thoughts .....because in my opinion the market is either overreacting or we are seeing a new set of parameters that will influence the global financial environment and by the way i also subscribe to the opinion that the more you try to fix it in panic striken moves the more alarmed the financial community feels and reacts in the other direction

  3. insted of announincing any mesaures to revive " Current Credit Crisis Situation " or any Direct or indirect involvements, FED should and must leave the entire matter on "Natural Way Solving Process" and it is also very clear that entire financial or economical courncenes will become more complex, complicated and long lasting due to any or all such artificial efforts. LET MARKET MECHANISMS FIND THAIR OWN WAY OD SURVIVAL.

  4. It seems that the more the Fed tries to do things to help, the more the market get spooked, based on the theory that if they keep needing to fix things then she really is broken!

  5. I think this is a good move. Central Bank has done a great thing by cutting off the lending rate. This will be helpful for the economy. Thanks for the nice post!! Dan

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