NEW YORK (AP) - The Federal Reserve's decision Friday to lend more to banks
may be a sign that policy makers want to avoid cutting interest rates any
further, as they combat a credit crisis that is far from over.
The Fed cut rates to 2 percent this week from 5.25 percent in September.
With the value of the dollar falling against foreign currencies, and rising
commodity costs pressuring consumers at the gas pump and the grocery store, the
central bank wants to steer clear of actions that will push prices up even more.
By lending directly to banks, the Fed can provide capital that banks need to
lend to consumers and businesses without fueling higher prices in industries
that don't, said Bill O'Grady, chief investment strategist at Wachovia
Securities.
"The more they make liquidity available through new channels, the less they
need to cut the federal funds rate," O'Grady said.
By relieving the seizure plaguing financial markets, the Fed hopes it can
free up the cash many banks are hoarding. This would presumably encourage banks
to lend their money out through mortgages or business or car loans.
Recent months have seen surging food and energy costs. Wall Street is
concerned that the threat of inflation and the persistent struggles of the
housing market would force consumers, who account for about 70 percent of U.S.
economic activity, to spend less.
The Fed said Friday it would boost the amount of emergency reserves it
supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied
in April. The Fed took this action and several other moves to boost credit in
coordination with the European Central Bank and the Swiss National Bank.
The Fed has committed about $600 billion in loans to banks, an amount that
represents perhaps half of all the distressed debt in the market, said Lehman
Brothers credit strategist Amitabh Arora. This helps moderate the risk that a
struggling bank might have to auction off its investments to avoid bankruptcy,
he said.
The latest moves are part of a series of actions the Fed has taken since the
credit crisis struck in August. The market has responded in the past six weeks,
showing signs that confidence is creeping back into the system. Stocks are up
more than 10 percent and prices for Treasurys and gold -- which typically rise
times of distress -- have slipped.
While other factors have contributed to the relief rally in the past few
weeks, Arora said these actions and the Fed's assistance in bailing out Bear
Stearns Cos. have helped.
But even after the Labor Department said the U.S. economy shed 20,000 jobs
last month -- fewer than expected -- stocks had a lukewarm response. That
suggests that, like the Fed, investors aren't sure the credit crisis has been
contained.
The report was a relief to Wall Street, which expected payrolls to fall by
70,000 jobs. The unemployment rate fell to 5 percent from 5.1 percent. It was
the fourth straight month of job losses, but the data signaled the economy might
be resisting recession.
Dan North, chief economist at Euler Hermes, said he expects the Fed to cut
rates one more time next month, by 0.25 percentage points, and then stop. The
Fed's statement accompanying its decision this week carried a more hawkish tone
on inflation -- suggesting Chairman Ben Bernanke is more worried about swelling
prices and thus less inclined to slash rates, he said.
Rather than sustaining banks with badly needed loans, North thinks the Fed
is "polluting the world with dollars," meaning making money so easy to obtain
that the dollar is losing value.
The market is "awash in liquidity," North said. Plenty of companies have
plenty of cash to lend or spend, North said.
"The Fed is trying a multitude of things," he said. "They're looking for
ways other than lowering interest rates, but what's happening is they're just
pumping liquidity into the system and it's not necessarily going to make the
banks want to lend more."
AP Business Writer Tim Paradis in New York contributed to this report.
(This version CORRECTS SUBS 2nd graf to correct 4.75 percent to 5.25
percent.)
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