Fed to Make $200 Billion Available To Lenders
Interest Rates Rise
Saturday, March 8, 2008
The Federal Reserve took strong action yesterday to restore order to frazzled lending markets while a new report showing unexpected job losses underscored the toll that credit markets are taking on the economy.
The world's financial plumbing is so clogged that the central bank sees a need for new steps to clean it out to prevent severe damage. Mounting panic in the credit markets is making it harder for Americans to get mortgages and is increasing the rates they must pay on credit cards and auto loans. Even solid businesses are finding it difficult to raise money to expand.
The nation shed 63,000 jobs in February, the Labor Department reported, the second straight month of losses and the worst monthly decline since March 2003. The construction and manufacturing industries continued to shed positions, as they have for months, but the decline broadened to include big job cuts by retailers and temporary help services.
Forecasters had expected a modest employment gain, and the weak numbers prompted many top economists to conclude that the U.S. economy is now in recession.
"You've now strung together three months in a row of private-sector job losses," said Stuart G. Hoffman, chief economist of PNC Financial Services Group. "That doesn't happen unless you're in a recession."
The Fed said it will make $200 billion available to financial institutions in an effort to ease a crisis of confidence that is making it harder for families and businesses to borrow money.
"They're recognizing that financial markets aren't functioning well, and that that creates risks to the real economy," said Vincent Reinhart, a resident scholar at the American Enterprise Institute and a former senior Fed official.
In the past two weeks, interest rates have spiked even for safe forms of debt, including bonds issued by state and local governments and those from some of the healthier companies, such as General Electric. Rates also have soared on bonds issued by the government-sponsored mortgage companies Fannie Mae and Freddie Mac.
The stresses in financial markets drove the average rate on a 30-year, fixed-rate mortgage to people with sound credit to 6.875 percent Thursday, up from 6 percent on Feb. 29, according to Palm Beach Financial Network. It edged down again to 6.5 percent yesterday.
The problems in the credit markets are counteracting much of the effect of interest rate cuts by the Fed over the past six months meant to stimulate the economy.
"A lot of what we've done has been mostly just to offset the tightening of credit that has arisen because of the financial situation," Fed Chairman Ben S. Bernanke said in congressional testimony last week.
Instead of simply cutting interest rates further, the Fed responded to this latest crisis yesterday with carefully targeted measures. The central bank said it will auction $100 billion to financial institutions, injecting money into the banking system by trading cash for troubled securities. The Fed will also make another $100 billion in cash available in exchange for securities issued by Fannie Mae and Freddie Mac, trying to restore confidence to the market for home mortgages.