WASHINGTON – The Federal Reserve Board yesterday took several emergency actions “to bolster market liquidity and promote orderly market functioning,” cutting a key interest rate, making Fed Bank of New York the lender of last resort for the largest dealers in federal bonds and approving up to $30 billion in financing for JPMorgan Chase & Co.’s purchase of The Bear Stearns Cos. Inc.
“Liquid, well-functioning markets are essential for the promotion of economic growth,” the central bank said in explaining its actions.
The Fed Board acted unanimously to cut the central bank’s primary credit rate by 25 basis points to 3.25 percent from the previous 3.50 percent, effective immediately, bringing its interest rate on direct loans to banks to within 25 basis points of the benchmark federal funds target rate. It also extended the maximum term of discount, or primary credit, loans to 90 days from the previous 30.
Also unanimously, it authorized the New York Fed’s creation of a new lending facility – “to improve the ability of primary dealers to provide financing to participants in securitization markets” – that will be in place for at least six months, starting today. Loans under the new facility may be made against “a wide range of investment-grade debt securities,” the central bank said. The interest rate will be the same as the primary credit rate or discount rate at the New York Fed.
Of its most controversial step, the Fed said only that “The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Cos. Inc.” JPMorgan CEO Jamie Dimon yesterday agreed to buy Bear Stearns – the second-biggest underwriter of U.S. mortgage securities – for $240 million, less than a 10th of the firm’s value last week, Bloomberg News reported. Fed and U.S. Treasury Department officials, including Treasury Secretary Henry S. Paulson Jr., had worked with the firms over the weekend to secure the deal. “Jamie Dimon’s done a great deal because the Federal Reserve is paying for it,” investor Jim Rogers, who co-founded the Quantum Hedge Fund with George Soros in the 1970s, told Bloomberg Television.
The central bank, in its first emergency lending to a non-bank institution in nearly 40 years, agreed to finance up to $30 billion of Bear Stearns’ “less-liquid assets.” The Fed is in effect assuming responsibility for managing the assets, a Fed official told reporters in a conference call.
“It is a serious extension of putting the Federal Reserve’s balance sheet in harm’s way,” Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington, told Bloomberg News. “That’s got to tell you the economy is in a pretty precarious state.”
The rate cut is the Fed’s seventh such action since August, and its sixth cut in the discount rate. Since the nation’s credit crunch began, the central bank also has cut the funds rate five times each, to 3.00 percent. (READ MORE) The bank’s policymaking Federal Open Market Committee is now expected to pare the federal funds rate yet again at its regular meeting this week.
Treasury securities rallied today, and the dollar fell to a record low against the euro and 12-year low against the yen, as traders increasingly bet the FOMC will cut the funds rate by 1.00 percent, Bloomberg said.
“Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. “The problem is, there’s so much concern about credit quality that now there are solvency issues.”
Additional information, including the full statement issued yesterday by the Federal Reserve Board, can be found at www.federalreserve.gov.
