Fed will lend money directly to businesses

The Fed had lent money only to banks before.

WASHINGTON (AP) — Frantically trying to stop the bleeding on Wall Street, the Federal Reserve took a first-time step Tuesday to get cash directly to businesses and hinted that interest rates could come down soon. Stocks continued their free fall anyway and hit new five-year lows.

The central bank invoked emergency powers to lend money to companies outside the financial sector and buy up mounds of commercial paper, the short-term debt that firms use to pay for everyday expenses like salaries and supplies.

The Fed, which has lent money only to banks before, made the move as the gravest financial crisis in decades wore on and concern spread around the world.

In a speech to the National Association for Business Economics, Fed Chairman Ben Bernanke delivered a strong signal interest rates may need to be cut. And he warned the country could be stuck in the economic doldrums for some time.

The gloomy assessment appeared to open the door wider to an interest rate cut on or before the Fed convenes again Oct. 28. The Fed’s key interest rate now stands at 2 percent.

Wall Street turned its back. The Dow Jones industrials lost 508 points, more than 5 percent, to close at 9,447, the lowest since Sept. 30, 2003. The Standard & Poor’s 500, a broader stock index, closed below 1,000 for the first time since that same day.

President Bush again sought to strike a reassuring tone and said the nation would make it through an economy blighted by job losses, record foreclosures and shriveled retirement savings. Congress’ top budget analyst estimated Tuesday that Americans’ retirement plans have lost as much as $2 trillion in 15 months.

Bush reached out to European leaders earlier Tuesday to urge coordination on efforts to solve the crisis. The White House said Bush was open to the idea of a summit.

The contagion has spread overseas. Britain’s chief financial regulator was readying a statement to make before markets opened today, and the BBC reported that the British government was poised to announce a rescue package for the banking system there.

Concerns are mounting that a global recession is developing, and pressure is growing on the U.S. government to do something beyond the $700 billion financial bailout package that Bush signed into law Friday.

To that end, the Fed announced it would begin buying companies’ short-term debt. The powers were bestowed during the Depression as part of the Federal Reserve Act.

The government’s bailout package is aimed at thawing lending by buying bad mortgage-related debt off the books of troubled financial institutions. The idea is that the banks would then be in a better position to lend and get the economy moving.

Commercial paper borrowing usually ranges from overnight to less than a week. But in the current climate of mistrust, the market has dried up considerably.

The action makes the Fed a crucial source of credit for nonfinancial businesses in addition to commercial banks and investment firms — and also exposes it to risk because so much of the debt would not be backed by collateral.