Thursday, October 30, 2008
An agreement is near to help 3 million homeowners avoid foreclosure.
WASHINGTON (AP) — The Federal Reserve slashed a key interest rate by half a percentage point Wednesday, driving it to a level seen only once before in the last half-century, and the government finally began distributing funds from the billions in the financial rescue package.
Those efforts and others were part of a concerted drive by officials, just days before a national election, to demonstrate they are moving as quickly as possible to deal with the most serious financial crisis to hit the country since the 1930s.
“Policymakers have their foot to the accelerator and they are using every effort at their disposal to stop the slide in the economy and financial markets,” said Mark Zandi, chief economist with Moody’s Economy.com. “And it’s not a moment too soon given the serious damage that has already been done.”
Wall Street, which the previous day posted the second-biggest point gain in history, was less impressed with Wednesday’s activity. The Dow Jones industrial average finished the day down 74 points, a drop analysts said partly reflected growing worries about whether the government’s actions will be sufficient to avert a deep and prolonged recession.
The Fed, as investors had hoped, announced a half-point cut in the federal funds rate, the interest that banks charge one another on overnight loans, driving it down to 1 percent, a low last seen in 2003-2004. That rate has not been lower since 1958 when Dwight Eisenhower was president.
Reducing the rate as low as zero cannot be ruled out, some analysts said, but they cautioned that reducing rates that far carried some risks, including that if the credit crisis suddenly worsened, the Fed would have used up its ammunition.
Analysts also noted that just lowering rates cannot serve as a panacea to overcome a credit crisis. While the goal is to encourage banks to begin lending again, financial institutions are skittish about extending new loans given the huge losses they have racked up in bad mortgages.
Meanwhile, the administration announced that the spigot had been opened on the $700 billion fund created by Congress on Oct. 3 to rescue the U.S. financial system. Treasury issued a report showing checks had been disbursed for $125 billion in payments to nine major banks, including Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley. The goal is to bolster their balance sheets so they will resume more normal lending.
And the administration was nearing an agreement on a plan to help around 3 million homeowners avoid foreclosure, according to sources who had been briefed on the matter. The program would be the most aggressive effort yet to limit damages from the severe housing slump.
Besides cutting interest rates, the Fed announced it was extending credit lines worth $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in an effort to bolster financial markets in those countries and relieve investors’ anxieties.
It brought to 14 the number of central banks that the Fed has entered into so-called swap arrangements for currency as a way to pump more liquidity into global credit markets, part of an effort that the Bank of England estimated has resulted in $5 trillion in support being put forward by governments worldwide.
The International Monetary Fund unveiled a new streamlined lending process to get support to countries caught up in the credit crisis, another effort by the 185-member institution to show it was prepared to perform its job as lender of last resort to countries facing difficulties. The IMF already has moved to help Iceland, Ukraine and Hungary with other nations quickly lining up for aid.
The Fed’s half-point interest rate cut marked the second rate reduction this month. The Fed slashed the rate by a half-point Oct. 8 in a coordinated action with other foreign central banks. Economists predict foreign central banks will follow suit with another round of rate cuts over the next week.
In a brief statement explaining Wednesday’s action, the Fed said that the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit.”
The central bank said that “downside risks to growth remain” holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.
Federal Reserve Chairman Ben Bernanke and his colleagues pledged they would “monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.”
Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed’s last meeting of the year Dec. 16.
But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction next year should the country’s economic troubles intensify.
The Fed’s action was quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, which was cut from 4.5 percent down to 4 percent, its lowest level in four years.