Fed announces $200-billion securities swaps to help banks
The temporary exchanges, which aim to ease the credit crunch, would take place in the form of auctions. The Dow surges more than 250 points in morning trading at the news.
Attempting to break the credit logjam that is threatening the already weakened economy, the Federal Reserve on Tuesday announced a new program to pump massive sums into the financial system.
The battered stock market, which on Monday had fallen to its lowest levels in at least 18 months, responded with its biggest one-day rally in five years. The Dow Jones industrial average rocketed 416.66 points, or 3.6%, to 12,156.81.
In a surprise, the Fed said it would begin to temporarily lend major banks and brokerages as much as $200 billion in U.S. Treasury securities it owns, in exchange for mortgage-backed securities that in many cases have slumped in value because of market anxiety over soaring loan defaults.
With rock-solid Treasury bonds in hand, Fed officials hope, financial firms will return to something closer to normal investing and lending practices. That could ease the credit crunch that took hold with the housing market's plunge last summer but since has spread to many unrelated corners of the banking system and economy.
"They've pulled out all the stops to try and fix this problem," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York.
Behind the huge dollar amounts involved in the Fed's latest move, experts said, is an urgent need to restore confidence in the financial system before the mood of investors and consumers gets so bad that policymakers can't turn it around.
"There is a danger of a downward spiral in the economy," Rupkey said. "They have to address it."
Many economists believe that the country has already entered a recession. The government Friday reported a net loss in February of 63,000 jobs, the most in five years.
When Fed policymakers meet next Tuesday, they are expected to again reduce their benchmark short-term interest rate from the current 3% to at least 2.5%.
Despite five cuts in its key rate since August, however -- and previous announcements of smaller programs to pump money into the financial system -- the Fed has been unable to reverse a cycle of tightening credit, falling home prices and tumbling securities markets.
Senior Fed staff members who spoke to reporters Tuesday on condition that they not be further identified said the central bank was frustrated with the lack of progress in bolstering the financial system.
"They're on Plan B now," said James Glassman, senior economist at JPMorgan Chase & Co. in New York. "The Fed knows there's a lot of danger here."
