Fed cuts key rate, offers quick aid to brokers

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WASHINGTON, Mar 17 (AFP): In a rare yesterday action aimed at heading off fresh market upheaval, the Federal Reserve cut a key rate for direct loans to certain financial institutions and said it would offer immediate liquidity to the brokerage system.
The moves came as global markets were on tenterhooks following a near-collapse of Wall Street giant Bear Stearns that highlighted a gridlocked financial system.
The US central bank announced it was cutting by a quarter-point to 3.25 per cent its primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition."
The cut, announced as Asian financial markets were set to open, came after a week of market turmoil and was part of "two initiatives designed to bolster market liquidity and promote orderly market functioning," a Fed statement said.
The Fed said it would make liquidity available starting Monday to "primary dealers," which include brokerages that are not currently eligible for direct loans from the central bank. The Fed board also extended the maximum time of discount window loans to 90 days from 30 days.
The moves came just two days ahead of a regularly scheduled Federal Open Market Committee meeting where the bank headed by chairman Ben Bernanke is widely expected to cut its base rate further in an effort to get credit flowing.
But the Fed has been forced into a series of extraordinary moves amid troubles in various parts of the financial system.
"The Fed obviously didn't think they could wait until Tuesday" to make the announcement, said Robert Brusca at FAO Economics.
"They obviously feared some type of run."
Brusca said one sign of panic was the deal announced just earlier in which JPMorgan Chase agreed to buy Bear Stearns for two dollars a share, or a fraction of its cost a week ago and a pittance compared to a year ago.
"This is not just Bear Stearns," Brusca said. "People have to wonder about other securities firms. Bear Stearns was at 150 dollars a share a year ago and now it was sold for two dollars. You don't have to be an expert to know something is wrong."
A Fed statement said the central bank had authorised the Federal Reserve Bank of New York "to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitisation markets" starting Monday and in place for at least six months.
Financial firms would be able to borrow at the primary credit or discount rate, which was just reduced by the Fed.
The New York Fed said it would accept a wide range of collateral, including mortgage-backed securities in some cases, to help institutions stuck with securities that cannot be traded in a gridlocked financial system.
It was the frozen credit markets that put the squeeze last week on Wall Street financial giant Bear Stearns, which faced a cash crunch and had to get a Fed loan through JPMorgan Chase.