The Federal Reserve’s response to the global credit crisis is aimed more at easing strains in financial markets than at averting an economic slump, Bloomberg reports
The Fed, along with central banks in Europe, pledged yesterday to offer as much as $64 billion to financial institutions. The joint action is designed to break a logjam in money markets that pushed up borrowing costs for lenders worldwide.
Fed officials told reporters that they view yesterday’s intervention as distinct from their interest-rate policy, which they anticipate will promote “moderate” growth next year. By attempting to keep the two tracks separate, economists said, policy makers are gambling that they will be able to avert a recession that would force them into deeper rate cuts than would otherwise be the case.
While “this is a positive step for central banks to address the liquidity issues in the markets,” says Richard Berner, the chief U.S. economist at Morgan Stanley in New York, “it doesn’t change my view of where the economy is headed.”
Stocks initially jumped yesterday after the Fed’s announcement of a new tool to quell a shortage of funds in the market where banks lend each other cash. They lost most of their gains by the end of trading as the plan failed to dispel concerns that credit losses will deepen.
European interest rates suggest yesterday’s action has yet to encourage banks to lend to each other. The cost of three-month loans in euros held at 4.95% today, the highest since December 2000, according to figures compiled by the European Banking Federation. Borrowing rates for dollars and pounds were little changed, the British Bankers Association reported in London today.