Fed cuts target for key rate to record low

The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

The central bank on Tuesday said it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 percent.

The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow Jones industrial average rose about 210 points in late-afternoon trading.

The Fed's action and statement made clear that economic conditions have worsened since its last meeting in October.

Federal Reserve Chairman Ben Bernanke and his colleagues said they will use unconventional methods to try to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century. For example, the Fed last month said it planned to purchase up to $600 billion in direct debt and mortgage-backed securities issued by big financial players including Fannie Mae and Freddie Mac in an effort to boost the availability of mortgage loans.

That move was one of a series the central bank has taken to increase its loans by hundreds of billions of dollars as a way to deal with the worst financial crisis to hit the country in more than 70 years.

The Fed on Tuesday also made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

Even before the announcement of a lower target, the funds rate has been trading well below the old target of 1 percent. For November, the funds rate had averaged 0.39 percent. Analysts said it was likely to fall further with the Fed setting the new target as low as zero.

The Fed's decision is expected to be quickly matched by a reduction in banks' prime lending rate, the benchmark rate for millions of business and consumer loans. Before the Fed announcement, the prime rate stood at 4 percent.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 percent. The lowest target rate before had been 1 percent, a level seen only once before in the past half-century.

Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The announcement on the deployment of unconventional methods had been expected given that Bernanke and other Fed officials have sought in recent comments to let financial markets know that the central bank will not be out of ammunition to battle the economic downturn even with the funds rate at such low levels.

In its statement Tuesday, the Fed said that since its last meeting in late October, "labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight."

The central bank acknowledged that it had room to battle the economic weakness because inflation pressures have "diminished appreciably" as the price of energy and other commodities has fallen sharply.

The Fed action came only hours after the government announced that consumer prices dropped by a record amount of 1.7 percent in November, reflecting a record decline in the price of gasoline and other energy products.

Automakers back to try to sell Congress on rescue

U.S. automakers are returning to Congress for high-stakes hearings they hope will persuade skeptical lawmakers to save their troubled industry with $34 billion in emergency aid, but a top Senate Democrat wants to hand their problem to the Federal Reserve.

Two weeks after a botched attempt on Capitol Hill, repentant leaders of General Motors Corp., Ford Motor Co. and Chrysler LLC were appealing to the Senate Banking Committee on Thursday with three separate survival plans that include massive restructuring, the ditching of corporate jets and vows by CEOs to work for $1 a year.

But they could expect a chilly reception on Capitol Hill. Even a top Democrat in charge of evaluating their aid requests made it clear he was eager to avoid voting on a bailout. Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, wrote to Federal Reserve Chairman Ben Bernanke on Wednesday asking the central bank chief whether there was anything stopping him from using his considerable lending authority to help the automakers.

And Senate Majority Leader Harry Reid, D-Nev., said it was up to the Bush administration to unilaterally rescue the Big Three with loans drawn from the $700 billion Wall Street rescue fund, since Congress was still unwilling to do so. "I just don't think we have the votes to do that now," he told The Associated Press.

Dodd's committee was hearing testimony on the companies' plans from GM CEO Rick Wagoner, Ford CEO Alan Mulally, Chrysler CEO Bob Nardelli, UAW president Ron Gettelfinger and the head of the Government Accountability Office. The House Financial Services Committee was to hold a similar session on Friday.

Automakers were trying to make the case that the billions in loans would be a bridge to survival and profitability.

In the streets outside the Capitol, all three companies were showcasing their futuristic, green models in hopes of counteracting their image as purveyors of gas-guzzling SUVs. Wagoner planned to drive to the hearing in a test version of the Chevrolet Volt, an extended-range electric vehicle expected to go on sale in 2010.

Reid and House Speaker Nancy Pelosi, D-Calif., said the hearings would help determine whether Congress would consider a massive aid package for the industry in a special session next week. Critics say the companies have been poorly managed and failed to show they won't be back for another government rescue.

The Big Three are struggling to stay afloat heading into 2009 during an economic recession, a steep decline in sales and a tight credit market. The three companies burned through nearly $18 billion in cash reserves during the last quarter.

Chrysler said it needed $7 billion by year's end to keep operating. GM asked for an immediate $4 billion as the first installment of a $12 billion loan, plus a $6 billion line of credit to use if economic conditions deteriorate. Both said in plans submitted to Congress that they could drag the entire industry down if they fail. Ford requested a $9 billion "standby line of credit" in case one of its Detroit competitors fails.

Wagoner and Mulally both say said they'll work for $1 a year -- a move Chrysler's Nardelli has already made -- if their firms accept government loans. All three plans envision the government getting a stake in the auto companies that would allow taxpayers to share in future gains if they recover.

In Detroit, the United Auto Workers union said it would delay the three companies' payments to a multibillion-dollar, union-run health care trust and essentially end a jobs bank program in which laid-off workers are paid most of their salaries. They also decided to let the Detroit leadership begin renegotiating elements of landmark contracts signed last year, a move that could lead to wage concessions.

The companies, union officials and car dealers were lobbying feverishly for the loans, arguing that the collapse of one or more of the Detroit carmakers would throttle the already weakened U.S. economy and jeopardize the nation's manufacturing sector.

Yet the bailout remains unpopular with the public. Sixty-one percent oppose providing the auto companies with billions in federal assistance, according to a CNN-Opinion Research Corp. poll released on Wednesday. Fifty-three percent said it would not help the country's economy.

The auto executives were roundly criticized for taking corporate jets to the hearings last month and this time made the 520-mile trip to Washington aboard hybrid cars. Underscoring the different approach, Wagoner and GM officials ate lunch Wednesday at Quiznos at a Pennsylvania rest stop along the way.

Fed refuse to identify 2 trillion dollars in bank loans

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

Treasury, Fed, Obama

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent so that anyone can ensure that our business is the people's business.''

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency'

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

Fed cuts interest rate to 1%

The Federal Reserve has slashed a key interest rate by half a percentage point as it seeks to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.

The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.

In a brief statement explaining Wednesday's action, the Fed said that the "intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit."

The central bank said that "downside risks to growth remain" holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.

Federal Reserve Chairman Ben Bernanke and his colleagues pledged that they would "monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Wall Street had staged its second biggest point surge ever on Tuesday with the Dow Jones industrial average climbing by 889 points in anticipation of the Fed's action. Trading was more subdued on Wednesday with the Dow actually slipping into negative territory immediately after the announcement, but surged up by about 200 points in late-afternoon trading.

Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed's last meeting of the year on Dec. 16.

But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction if needed next year should the country's economic troubles intensify.

David Jones, chief economist at DMJ Advisors, said the Fed's rate cut will be followed over the next week by similar action in other major countries as they grow more concerned that the recession that began in the United States is spreading to their regions.

But he said a section of the Fed's statement where it listed all the efforts taken so far to battle the slowdown was a signal the central bank believes it has done enough for now.

Other economists disagreed, saying the Fed clearly lowered its worries about inflation while raising concerns about economic growth.

Sung Won Sohn, an economist at the Smith School of Business at California State University, said he believed the Fed will make the "momentous decision" to move the funds rate to zero if events in coming months show such an action is needed to battle the global credit crisis.

In its statement, the Fed indicated it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.

While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

The Fed's action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

The central bank also announced that it was lowering its discount rate, the interest it charges to make direct loans to banks, by a half-point to 1.25 percent. This rate has become increasingly important as the central bank has dramatically increased direct loans to banks in an effort to break the grip of the credit crisis.

Bernanke pledged in a speech earlier this month that the Fed "will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity."

In addition to the rate cuts, the Fed has been moving to pump billions of dollars into the banking system to help unfreeze markets that seized up in dramatic fashion last month. The ensuing meltdown of financial markets caused the Bush administration to successfully lobby Congress to pass on Oct. 3 a $700 billion rescue package to make direct purchases of bank stock and buy up bad assets as a way of getting financial institutions to start lending again.

That money started flowing earlier this week with $125 billion going to nine of the nation's biggest banks. Other industries, including automakers and insurance companies, are in talks with the administration to get a share of the bailout funds.

And there is pressure from lawmakers to deploy some of the bailout resources to provide mortgage guarantees to encourage more banks to rework home loans to stem a record tide of foreclosures.

Fed is expected to cut interest rates by half-point

All eyes will be on the federal reserve today as investors look to see if they will be cutting interest rates by a half-point. Last time this happen I thought the stock market would rally, only to see it fall. We'll see what happens today, especially after yesterday's rally on Wall Street. The Dow closed yesterday with a rally of almost 1,000 points. Sure would love to see a follow-thru today.

As investors wait for the market to open in about another hours, everyone will have there attention on what the fed will do with interests rates. They are expected to slash a key interest rate by a half-point, pushing the federal funds rate down to 1 percent, as they wrap up a two-day meeting.

The worst financial crisis in 70 years has forced the Fed to employ all the weapons in its arsenal — including cutting interest rates to near historic lows — to try to keep the country from plunging into a deep recession.

A new cut would put the Fed's target for the interest banks charge each other on overnight lows down at level last seen during a 12-month period from June 2003 to June 2004. Before that period, the funds rate had not been that low in 45 years, since Dwight Eisenhower was president.

Economists believe the Fed is prepared to cut rates that low because of the rising fears that the financial turmoil of the past two months is raising the specter of a deep and prolonged recession.

"The Fed is going to send a very strong signal that they will do whatever it takes to restore stability to the economy," predicted Mark Zandi, chief economist at Moody's Economy.com.

The prospect of another sizable rate cut, coming just three weeks a half-point move that was coordinate with a number of countries, sent the stock market soaring on Tuesday, pushing the Dow Jones industrial average up by 889.35 points, its second-biggest point gain in history.

Even if the Fed does fulfill the desires of investors with its action Wednesday, it is not likely to end the turbulence on Wall Street. Analysts are cautioning to be prepared for more stomach-churning days ahead as investors struggle to deal with a severe credit crisis and what could be the worst recession in at least two decades.

A half-point rate cut on Wednesday would push borrowing costs lower for millions of consumer and business loans with banks moving quickly to match the Fed's action by lowering their benchmark prime lending rate from 4.5 percent, where it has been for the past three weeks, down to 4 percent.

The Fed is hoping that the sharply lower rates will help boost economic growth going forward. The government will release its first look at economic activity in the July-September quarter on Thursday and that is expected to show that the gross domestic product shrank at a rate of 0.5 percent in the third quarter.

Many analysts believe the GDP — the measure of the value of all the goods and services produced in the country — is falling further in the current quarter and will also fall in the first three months of next year.

That pattern would meet the classic definition of a recession as at least two consecutive quarters of declining GDP. Many economists think that when the National Bureau of Economic Research, the official arbiter of when recessions begin and end in this country, makes its decision, it will date this downturn to the beginning of 2008, when the labor market started shedding jobs.

The country has lost jobs every month this year and the unemployment rate now stands at 6.1 percent. Economists forecast that it could hit 8 percent by the spring of next year due to the severity of the shutdown of bank lending, a credit crisis triggered by billions of dollars of losses in mortgage lending as defaults soared to record levels.

That has jolted banks, resulted in government takeovers of the nation's two biggest mortgage companies and the biggest shakeup on Wall Street since the Great Depression. Banks have become fearful about making new loans, a development that has had ripple effects on American businesses trying to get loans for normal operations, and on American consumers, who are having trouble getting car loans and home loans.

"The credit squeeze has moved from Wall Street to Main Street and it is seriously affecting the real economy and now it has gone global," said Sung Won Sohn, an economist at the Smith School of Business at California State University, Channel Islands.

Many analysts believe a rate cut in the United States will be followed by cuts in other major economies as central banks around the world try to inject confidence into a badly shaken financial system.

Analysts are split, however, on whether a Fed rate move this week will be followed by another rate cut at the central bank's last meeting of the year on Dec. 16.

Some analysts think the Fed could drive the funds rate as low as 0.5 percent and might even go to zero, which the Bank of Japan did in an effort to combat a decade-long bout of malaise in the 1990s caused by a real estate bust in that country.

Other analysts believe the Fed will be content to lower the funds rate to 1 percent and leave it there, partly because pushing it any lower would remove any cushion to cut the rate further should the economy fail to respond and the downturn worsen.

These analysts believe the Fed will depend on its other efforts to battle the credit crisis, which involve supplying massive resources to the banking system.

David Jones, chief economist at DMJ Advisors, said that Fed officials will probably decide that all the global efforts to fight the credit squeeze, including a $700 billion rescue fund in this country, should be given time to work.

But Jones, who thinks the economy will remain in a recession until the middle of next year, said he believes that the Fed will signal that it is prepared to leave the funds rate at 1 percent for some time to come.

When the Fed under former Chairman Alan Greenspan "cut the funds rate to 1 percent and left it there for a year, they kept saying rates would remain low for a considerable period of time," Jones said. "I think this time rates will stay at 1 percent for a longer period."