At its regularly scheduled March 18 meeting, the Federal Reserve Board’s Federal Open Market Committee voted to cut both the Fed Funds target rate and the Discount rate by 75 basis points each, to a Fed Funds rate of 2.25%, and a Discount rate of 2.50%. It was widely anticipated that the Fed would cut its target for Fed Funds rates at this meeting.
The Discount Rate had been cut Sunday, March 16, by 25 basis points, to 3.25%, in an extraordinary response to the collapse of Bear Stearns and sale of that firm to JPMorgan Chase on the 16th. Coupled with today’s additional 75 basis point cut in the Discount rate means that the Fed has cut the discount rate by a full point in the last three days.
Not all Fed governors agreed to this action; the vote was eight to two, with “Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting,” the Fed reported in a statement, voting against cuts this steep.
Although the Fed asserts that it is still concerned about inflation, in the March 18 announcement it stated: “Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”
During the current financial crisis the Fed has become much more overtly active, creating new lending facilities for primary dealers, including both depository banking institutions and broker/dealers, allowing a much broader spectrum of primary dealers’ assets to be pledged as collateral, and lengthening the terms for loans from the Discount window, in an effort to mitigate liquidity and solvency issues that may be faced by some broker/dealers and banks.
To recap the Fed’s recent activity: On February 29, the Fed announced biweekly Term Auction Facility (TAF) “auctions of 28-day credit,” offering two $30 billion auctions in March, and saying it would “conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets.”
On March 7, the Fed announced an increase in the amount of the March TAF to $50 billion each–a net increase of $40 billion in 28-day credit, and added Repos that are “expected to cumulate to $100 billion,” in added liquidity.
Then, on March 11, the Fed announced that, in concert with G-7 central banks in Canada, England, Switzerland, and Euroland, a coordinated effort would be made to add liquidity. The Fed expanded its securities lending program through a new “Term Securities Lending Facility (TSLF)” and said it would lend “up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS,” greatly expanding the types of collateral it would accept. At the same time, concerned about the plummeting U.S dollar, the Federal Open Market Committee arranged a currency “swap line” with the Swiss National Bank and the European Central Bank.
On March 14, the Fed and JPMorgan Chase arranged to provide secured funding to Bear Stearns, ‘as necessary, for an initial period of up to 28 days,” JPMorgan said, via the the Fed’s Discount Window.
On Sunday, March 16, the Fed backed up the JPMorgan Chase purchase of the crippled Bear Stearns by agreeing “to fund up to $30 billion of Bear Stearns’s less liquid assets,” according to JPMorgan. On the same date, the Fed announced on the Sunday evening before trading started in Asia and Europe, that it had lowered the Discount rate by 25 basis points, and set up a longer-term lending facility for primary dealers, lending directly to both banks and broker/dealers at the best, “primary” Discount rate, allowing even broader types of securities to be used as collateral, and lengthening the “maximum maturity of primary credit loans to 90 days from 30 days.”