LENDING MOMENTUM: Fed pumps $200-billion into credit markets
By HELEN HUNTLEY, Personal Finance Editor
Published March 12, 2008
The Federal Reserve put $200-billion on the line Tuesday to get the credit markets moving again, prompting Wall Street to celebrate like happy days are just around the corner.
But even the usually cheery economists at Wachovia Bank acknowledged we're probably in a recession that's going to do a number on corporate profits.
Here's what the Fed announced to kick off the day: Financial institutions will be able to borrow up to $200-billion from the Federal Reserve for up to 28 days at a time, using some of their troubled mortgage-backed securities as collateral. This, in turn, will give the banks the ability to lend the money to others, creating liquidity in the financial markets.
The European Central Bank, the Bank of Canada and the Swiss National Bank also will be making similar loans of up to $45-billion. Together the actions offer temporary relief to banks stuck with mortgage-backed securities because nobody wants to buy them.
"In effect, there's a quiet financial panic, and the Fed is working to offset that," said Wachovia Bank senior economist Mark Vitner. "This is probably not the last innovative move they're going to make."
The announcement shows the Fed is willing to do something more than ratchet down short-term interest rates.
"It's not just a rate cut," said Antony Conroy, managing director and head trader for BNY ConvergEx Group. "It shows the Fed is willing to do things that are a little out-of-the-box to shore up credit issues. I really think they went to the heart of the issue."
The news got an enthusiastic reception on Wall Street, but even that spurt wasn't enough to erase the damage stocks have suffered this year.
Wachovia economists said Tuesday they think the economic numbers have gone negative. They now forecast a 0.3 percent contraction in Gross Domestic Product in the first quarter and a 0.5 percent drop in the second quarter, which would meet the official definition of a recession.
After that, they think the tax rebate checks will boost the economy into positive territory.
"It's not a slam dunk that we're going to have a recession," Vitner said, but he called it a probability.
The bank economists also said they expect commercial real estate prices to fall 15 to 20 percent nationally.
Information from Times wires was used in this report. Helen Huntley can be reached at firstname.lastname@example.org or (727) 893-8230.
Wall Street rallied on the Fed's action, sending the Dow Jones Industrial Average up more than 416 points, the biggest one-day point gain in nearly six years. The blue chip stocks in the Standard & Poor's 500 Index gained 3.6 percent, while the Nasdaq Composite Index rose 4 percent.
Dollar supporters cheered the fact that the Fed is trying alternatives to rate cuts, but despite the rare rally, the currency remained near a record low against the euro and near an eight-year low against the yen. Currency traders are worried that the U.S. is slipping into recession and that further interest cuts are coming.
The Federal Reserve's Open Market Committee meets again next Tuesday. Some investors had been expecting a cut of three-quarters of a point, but a half-point cut seems more likely in the wake of the new lending program announced Tuesday.