New Fed liquidity effort boosts confidence, for now

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WASHINGTON, Mar 12 (AFP): The latest Federal Reserve-led initiative to ease a global credit squeeze got a vote of confidence from financial markets Tuesday as analysts said it could help a gridlocked financial system.
The actions by the Fed and other central banks are expected to help banks and brokerages temporarily swap their mortgage-backed securities for Treasury debt and possibly unclog credit markets, say analysts.
The moves got a strong vote of confidence from financial markets, as Wall Street's blue-chip Dow industrials surged 3.55 per cent in the biggest rally since 2002.
Brian Wesbury, economist at First Trust Portfolios, said the action was better than a rate cut because it was targeted at the most troubled financial institutions.
"By narrowly targeting the problems in the credit markets rather than broadly influencing the economy through additional steep rate cuts, the Fed has greatly improved its approach," Wesbury said.
"The troubled financial markets are like an athlete with the wind knocked out of him. Today's targeted Fed approach is like giving him smelling salts to get him back up, rather than the unnecessarily long-lasting effects of shooting him up with adrenaline."
Yet the long-term impact of the plan remained unclear, and many economists say financial markets still face ongoing stress.
"The good news is this will help brokers and banks; the bad news is it will do nothing to help the housing market, or stop the decline in house prices," said Barry Ritholtz, analyst at the research firm FusionIQ.