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The Federal Reserve announced a series of new steps Sunday to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession.
The central bank approved a cut to its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.
The steps are “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement. “Liquid well-functioning markets are essential for the promotion of economic growth.”
The new lending facility will be available to financial institutions on Monday.
It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral will be accepted to back the loans.
The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.
The Fed’s actions are the latest in a recent string of unconventional steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.
The “discount” rate cut announced Sunday covers only short-term loans that financial institutions get directly from the Federal Reserve.
Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating.
The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.
The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.
AP Business writers Joe Bel Bruno and Madlen Read contributed to the report from New York.

via AOL

WASHINGTON - Staring at spreading financial dangers, the Federal Reserve announced a rescue package that would pour as much as $200 billion into banks and investment houses and allow them to put up risky home-loan packages as collateral.

Wall Street rebounded on the news Tuesday with its biggest rally of the year and hoped the Fed had even more cards to play.

The Federal Reserve s maneuver, coordinated with central banks overseas, was its latest effort to stem the global credit crisis and severe housing woes that threaten to bury the United States in its first recession since 2001. Fed Chairman Ben Bernanke and his colleagues have been stretching for new and imaginative ways to confront the situation.

They are hoping to bring relief where it is sorely needed: in the market for mortgage securities. Home loan financing has become much harder to get as nervous lenders have hunkered down.

It is a highly significant move. The Fed is innovating in a way that is going to push liquidity directly into the mortgage markets, where it is most needed, said David Jones, president of DJM Advisors.

On Wall Street, the Fed s action propelled stocks upward. The Dow Jones industrials jumped by some 416 points.

Traders will be looking for still more action. Recent stock rallies have been followed by renewed selloffs by investors who believe the economy is still headed for recession, if it isn t there already.

Assuming Tuesday s action helps to stabilize turbulent financial markets, that could reduce the chances that the Fed will order a deep, three-quarters of a percentage point cut in its key interest rate next week to further encourage lending and other economic activity. An increasing number of economists now believe the Fed is more likely to cut rates by a half-point, though that could newly roil Wall Street.

The Federal Reserve announced it would allow squeezed financial institutions including big investment houses and banks to borrow up to $200 billion in super-safe Treasury securities by using some of their more risky investments as collateral.

The Fed announced the creation of a new Term Securities Lending Facility (TSLF) to provide financial institutions with 28-day loans of Treasury securities, rather than overnight loans. The institutions would pledge other securities including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac as collateral for the loans. Fed officials said it s the first time they ll be accepting mortgage-backed securities through this type of lending program.

Firms that were having difficulty financing their mortgage positions have been thrown a lifeline, said Stephen Stanley, chief economist at RBS Greenwich Capital.

By allowing financial institutions to put up mortgage-backed securities for which there s little market appetite in return for safe securities that are in high demand, the Fed hopes to take pressure off financial companies and make them more inclined to lend to individuals and to businesses.

If the effort works, it should in time help to keep home loan rates down, especially on those backed by Fannie Mae and Freddie Mac, which are the few remaining sources of mortgage financing as credit has increasing dried up elsewhere, said Mark Zandi, chief economist at Moody s Economy.com.

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