» This Story:Read +|Watch +| Comments

Federal Reserve edges away from crisis measures

Network News

X Profile
View More Activity
By Neil Irwin
Washington Post Staff Writer
Thursday, December 17, 2009

The Federal Reserve said Wednesday that it will shut down some of the emergency triage measures it put in place at the height of the financial crisis but will leave interest rates near zero out of continuing concern about the weak U.S. economy.

This Story

The decision reflects steady improvement in the functioning of financial markets. In recent months, the Fed's emergency programs to support money-market mutual funds, short-term corporate lending, investment banks and overseas banks had gotten little use, and major banks have begun to repay their government bailout money.

Even the troubled auto giant General Motors recently said it plans to return some federal assistance next year.

Still, the central bank's plans to terminate its unconventional lending programs on Feb. 1 will present a new test for the financial industry. There have been waves of worry in global markets in recent weeks, particularly in Europe and the Middle East, and losses on commercial real estate could endanger many smaller U.S. banks in the coming year.

The programs being wound down were major parts of the Fed's efforts to aid the broken-down financial system by directing cash into dysfunctional private markets, using its own ability to create money and an obscure provision in the Federal Reserve Act allowing loans to almost any entity under "unusual and exigent circumstances."

With private markets improving and the central bank's programs increasingly having fallen into disuse, the Fed is looking to pull away its supports.

"They're saying that these extraordinary life-support programs are becoming increasingly unnecessary and could be counterproductive," said Stuart Hoffman, chief economist at PNC Financial Services Group. "Like any good doctor, they're laying out a treatment plan, saying they'll unhook the financial system from these machines over the next few months."

The decision came on the same day that Fed Chairman Ben S. Bernanke was named Time magazine's Person of the Year for efforts -- including the creation of the soon-to-be-shelved programs -- that helped prevent a collapse of the financial system. A Senate committee will vote Thursday on whether to forward his name to the full Senate to be confirmed for a second four-year term.

The Fed is gradually returning its policymaking apparatus to normal, using a meat-and-potatoes response to the recession: When the unemployment rate is high, low interest rates help create jobs by boosting growth, and the Fed is likely to raise rates only once the economy is on more solid footing or inflation threatens to get out of hand.

That's why the Fed, after a two-day policymaking meeting, left its target interest rate near zero and said it will probably keep it very low for an "extended period," reflecting the deep economic hole the nation has yet to climb out of.

At the same time, the central bank said it would unwind its more unconventional programs. The Fed had already said it will complete $1.25 trillion in purchases of mortgage-backed securities by the end of March, and it completed purchases of $300 billion in Treasury bonds in October.

Next in line: An alphabet soup of programs designed to pump cash into the financial system, known by acronyms like PDCF (Primary Dealer Credit Facility) and TSLF (Term Securities Lending Facility). Both will be allowed to expire Feb. 1, as will the money-market support, the program for short-term corporate lending and swap lines designed to pump dollars into foreign banks.


CONTINUED     1        >

» This Story:Read +|Watch +| Comments
© 2009 The Washington Post Company

Network News

X My Profile
View More Activity