A Surprise Weekend Announcement by the Federal Reserve

In a move designed to bolster market liquidity and orderly functioning of the financial markets, the Federal Reserve, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities. The Fed lowered its discount rate by a quarter of a percentage point from 3.50 to 3.25 percent today. This move was made today in anticipation of the financial markets opening in Asia on Monday. The central bank also approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. and its assets.

Just a few days ago, the central bank agreed to emergency loans to Bear Stearns (see article below). Fed officials also announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. This shows that the Fed Chairman, Ben Bernanke, is stepping up efforts to keep financial markets from spiraling further downward. These measures are designed to prevent not only a crisis in the financial markets but also a deeper crisis of confidence investors are already having in the broader markets and economy.

Starting tomorrow (3/17/08), primary commercial banks will be able to borrow at the rate under a new lending facility, to be in place for at least six months, according to the Federal Reserve.

``These steps will provide financial institutions with greater assurance of access to funds,'' Bernanke said during a conference call with reporters today.

The Fed's actions are the latest in a series of unconventional steps to deal with a worsening credit crisis that has caused turmoil on Wall Street. This action comes just two days before the central bank's scheduled meeting on Tuesday (3/18), when another big cut to a key interest rate is expected to be announced. It is speculated that the Fed, at this meeting, will lower its benchmark rate (the discount rate) by as much a full percentage point, lowering the rate to just 2%. If this happens this would exceed the previous reduction of .75% that was announced on 1/22/08.