Fed set to lower rates again

The action comes on the heels of an emergency rate cut Sunday night.

Chicago Tribune

WASHINGTON — The Federal Reserve is poised to aggressively lower interest rates again today, perhaps by as much as 1 percent, as it continues its efforts to ease a major credit crunch and serve as a virtual safety net for Wall Street investment bankers.

With fear gripping Wall Street, the Fed is trying to stave off a repeat of the collapse of investment banking giant Bear Stearns Cos., which prompted an emergency rate cut Sunday and the controversial move to help arrange a deal to sell the well-known firm to JP Morgan Chase Co. at the rock-bottom price of $2 a share.

The central bank’s policymaking arm, the Federal Open Market Committee, will decide if and how much to cut interest rates amid market expectations its benchmark interest rate, now at 3 percent, will be dropped by one-half to a full percentage point.

With the economy in what some analysts say is a recession and a crisis of confidence sweeping New York’s banking center and the country, David Wyss, chief economist at Standard & Poor’s, predicted the central bank would slash interest rates by a full percentage point. Since last September, it has already reduced interest rates by 2.25 percent.

Its aggressive rate-cutting campaign has yet to halt the credit crunch, and some economists such as Brian Wesbury and Robert Stein of FT Advisors in Lisle, Ill., say the reductions have created an incentive for businesses and consumers to postpone spending, while awaiting even lower rates.

“In the long run, our economy is going to be fine,” President Bush said last Tuesday after a meeting with his economic team dealing with financial markets. “Right now, we’re dealing with a very difficult situation.”

Meanwhile, the stock market edged higher Monday after the central bank’s Sunday night dramatic move. After an up-and-down day, the Dow Jones Industrials climbed 21.16 points to 11,972.25. The S&P 500 fell 11.54 to 1,276.60.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, praised the Fed’s decision and said that if it had not acted, the market could have plunged sharply, especially if Bear Stearns had been forced into bankruptcy.

But with this action, the Federal Reserve has suddenly turned itself into Wall Street’s safety net, a new and controversial role that could be expensive if it doesn’t succeed in easing the credit crunch and more Wall Street firms get into trouble.

“We are in uncharted waters,” said Joel Naroff, a Holland, Pa., economic consultant. “The financial system looks nothing like it did 10 or 20 years ago with new financial products and the internationalization of capital flows. The Fed is facing issues that are new.”

Chairman Ben Bernanke announced Sunday night that Wall Street’s largest investment banks could borrow directly from the Fed just as commercial banks now do — and use questionable collateral, such as mortgage-backed securities, to boot.

Many critics say that the central bank is pledging to rescue Wall Street without demanding an end to excesses that contributed to today’s jittery markets, creating a “moral hazard” that could lead to more excesses.

“The Federal Reserve continues to give aid to the irresponsible,” said one of these, Peter Morici, business professor at the University of Maryland. Others said the U.S. government seemed much quicker to bail out Wall Street bankers than people who cannot afford their mortgages.