“Poole Says Only ‘Calamity’ Would Justify Rate Cut Now…”

From Bloomberg:

“The Federal Reserve lowered the interest rate it charges to banks and acknowledged for the first time today that an extraordinary policy shift is needed to contain the subprime-mortgage collapse that began roiling the world’s financial markets two months ago.”

“This is the first reduction in borrowing costs between scheduled meetings since 2001, and Ben S. Bernanke’s first as Fed chairman. Officials kept the benchmark federal funds rate target for overnight loans between banks at 5.25 percent. Policy makers next meet to set the rate on Sept. 18. Futures indicate traders anticipate at least a quarter-point cut.”

“President George W. Bush has “full confidence” in the Fed, White House spokesman Gordon Johndroe told reporters in Crawford, Texas. He added that Treasury Secretary Henry Paulson spoke with Bush last night to update him on financial-market developments. ”

““Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,” the Federal Open Market Committee said today. “The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects.””

“Stocks rose. The Standard & Poor’s 500 index gained 0.8 percent to 1,422.35 as of 10:50 a.m. in New York.”

“The Fed loosened terms on discount-window borrowing after its injections of cash into the federal-funds market in the past week failed to ease companies’ access to capital. While there were enough funds in the system even to drive the effective federal funds rate below the 5.25 percent, credit in other markets was scarce.”

“The amount of commercial paper outstanding, a key financing tool, fell the most in the week to Aug. 15 since the 2001 terror attacks. Countrywide Financial Corp., the biggest U.S. mortgage lender, tapped an entire $11.5 billion bank line yesterday to get funds.”

““This is an attempt to wake the world up,” said John Roberts, managing director and head of government bond trading at Barclays Capital Inc. “The system is flush in overnight money. Where the system is stacked up is in term funding.””

“The Fed Board highlighted in its statement that it will “continue to accept a broad range of collateral” for discount- window loans, including “home mortgages and related assets.””

“The Fed’s action reflects alarm that more restrictive lending conditions and volatility in financial markets will deepen the housing recession, weaken employment and erode economic growth. As recently as the Aug. 7 meeting, the FOMC said inflation was still the biggest danger to the economy.”

“Today’s decision shows policy makers understand “the various different tools the central bank has at its disposal,” said Neal Soss, chief economist at Credit Suisse in New York, who worked as an assistant to former Fed Chairman Paul Volcker. “This is a masterful move because it doesn’t actually feed some of the concerns about moral hazard” of bailing out investors, he said.”

“The subprime rout is the biggest challenge for Bernanke, 53, since he took office in February 2006. Under predecessor Alan Greenspan, the Fed in 1998 cut interest rates three times as currency crises in emerging markets roiled Wall Street.”

“Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. Companies such as London-based Cadbury Schweppes Plc have delayed asset sales, and banks including JPMorgan Chase & Co. and Deutsche Bank AG have been left on the hook for as much as $300 billion of debt they’ve agreed to provide.”

“Economists and policy makers anticipate a slower expansion in the second half. For the year, Fed governors and presidents expect growth, on average, of about 2.25 percent to 2.5 percent, Bernanke told Congress last month. The projections are about a quarter-point below the last round in February, mainly on weakness in homebuilding.”

From MarketWatch:

“By cutting the discount rate instead of the federal funds rate, the Fed signaled that it believes problems are mainly confined to the financial system, and are not yet impacting the broader economy. The cut in the discount rate provides funds to banks, but does little to change consumer and commercial interest rates, as a cut in the fed funds rate would do.”

“In effect, the FOMC has shifted its policy bias, which had tilted toward a rate hike, to leaning toward a rate cut. Financial markets expect the FOMC to cut the fed funds rate in September.”

“The discount rate stood at 6.25% previously; it’s been set at one percentage point above the federal funds rate.”

“The discount rate is set by the seven members of the Federal Reserve Board, while the federal funds rate is targeted by the FOMC, which includes all the members of the Fed board, plus five of the 12 regional Fed bank presidents. St. Louis Fed President William Poole, who is a voting member this year, did not participate in the conference call because he was traveling. Dallas Fed President Richard Fisher took his place.”

“The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from regional Federal Reserve lending facilities. It differs from the key federal funds rate, which is the rate at which private institutions lend to other depository institutions overnight.”

“Many economists expect the Fed to cut the fed funds rate at the FOMC’s next meeting, scheduled for Sept. 18. The Fed has been providing extra liquidity to the markets on a temporary basis through its open-market operations but had vowed to keep the federal funds targeted at 5.25%.”

“Since the housing and credit bubbles began to deflate, dozens of lenders have gone out of business, several hedge funds have failed, and thousands of homes have gone into foreclosure.”

From AZCentral:

“Private economists praised the action by Federal Reserve Chairman Ben Bernanke and his colleagues, saying it should help steady jittery markets although many expect a cut in the federal funds rate to follow.”

““This is fine for temporary relief, but I think they will still have to cut the funds rate because the markets will still be turbulent,” said David Wyss, chief economist at Standard & Poor’s in New York.”

“The move to cut the discount rate will not have a major impact on consumer interest rates in the way that cutting the federal funds rate triggers an immediate drop in banks’ prime lending rate, the benchmark for millions of consumer and business loans.”

“However, Friday’s move was expected to help with a severe cash crunch facing many businesses, including mortgage companies, which are having trouble getting loans for short-term financing needs.”

“The nation’s once high-flying housing market is sinking deeper into gloom, and credit, the lifeblood of the economy, is drying up. Many economists believe these problems, including declining consumer confidence, could lead to a recession.”

“Since setting a record close of 14,000.41 just a month ago, the Dow Jones industrial average has shed 1,154.63 points in a string of triple-digit losing days that have raised anxiety levels not just on Wall Street but on Main Street as well.”

“Countrywide Financial Corp., the nation’s largest mortgage banker, was forced to borrow $11.5 billion on Thursday so it could keep making home loans. It was a move that rattled investors who have watched a number of smaller mortgage companies go under because of credit problems.”

“The Fed and other central banks already had infused the banking system with billions of dollars in an effort to keep short-term interest rates from surging and making credit even more difficult to obtain.”

“However, those billions did not calm investors worried about which big hedge fund or mortgage company will be the next to announce serious problems. For that reason, investors have become fearful to supply money through credit markets to companies even if they have strong credit records.”

Tags: fed, federal reserve, rate, cut, countrywide in trouble, credit, arizona real estate, bloomberg, azcentral, arizona republic, bernanke, greenspan