WASHINGTON - The Federal Reserve, in an extraordinarly rare weekend move, took bold action yesterday to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the US economy.
The central bank approved a cut in 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 new lending facility will be available to big Wall Street firms today.
"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call last night.
The Fed acted just after JP Morgan Chase & Co. agreed to buy rival Bear Stearns Cos for $236.2 million. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JP Morgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.
The new lending facility - described as a cousin to the Fed's emergency lending "discount window" for banks - is geared to give investment houses a source of short-term cash on a regular basis - if they need it.
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 - including investment-grade mortgage backed securities - will be accepted to back the overnight loans.
Treasury Secretary Henry Paulson said he was pleased by yesterday's developments.
"Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets," he said.
"We appreciate the actions taken by the Federal Reserve this evening," said White House press secretary Dana Perino. "Secretary Paulson and Chairman Bernanke are actively engaged in addressing issues affecting our financial markets. Secretary Paulson has kept the president briefed on recent developments."
The "discount" rate cut disclosed yesterday covers only short-term loans that financial institutions get directly from the Federal Reserve. It doesn't apply to individual borrowers.
The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis.
The Fed last week said it would pour up to $200 billion into Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring needed relief in the market for mortgage securities.
The Fed's action yesterday came just two days before the central bank's scheduled meeting tomorrow, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.
"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown," Richard Yamarone, an economist at Argus Research, said last night.