WASHINGTON — The Federal Reserve's extraordinary move to rescue a tanking investment giant and expand its emergency lending appeared to pay off Monday. Although most U.S. markets showed fresh signs of strain, none snapped, and while some banks and Wall Street firms saw their stocks pummeled, none collapsed.
The question for the central bank now is whether its new policies will calm a jittery global marketplace for more than a day and whether it can reassure American taxpayers they won't end up holding the bag.
By putting up its own funds to back a takeover of Bear Stearns Cos., the central bank moved into territory normally left to the private sector and embarked on one of the greatest expansions of its lending authority since the Great Depression.
Analysts and Fed officials sought Monday to dispel fears that the central bank was taking on too much risk as it scrambles to halt a credit crisis that threatens to plunge the country into a long and damaging recession.
"The Fed is not your normal corner bank," said Mark Zandi, chief economist of forecasting firm Moody's Economy.com in West Chester, Pa. "They set the rules, and they can set them just about any way they want."
"The Fed is playing its classic role as lender of last resort," said economist David M. Jones, a veteran observer of the central bank. "They're absorbing some stresses so the credit markets can keep working."
In a further effort to buoy the flailing economy, the central bank is expected to drop its benchmark interest rate by as much as a full percentage point to 2% when Fed policymakers meet today. That would make the rate's decline over the last six months one of the swiftest in two decades.
As unusual as the Fed's current rate policy is, the key controversy Monday centered on its decision to lend $30 billion to JPMorgan Chase & Co. to help consummate a fire-sale purchase of Bear Stearns, and a move to begin lending directly to large nonbank financial firms for the first time since 1936.
Both strategies set precedents that are likely to be tested quickly.
For the last 70-plus years, the Fed has lent only to banks. By enlarging its circle of eligible borrowers, the central bank has enlarged the potential demands on its resources. Several substantial financial firms, including Ohio's biggest bank, National City Corp., saw their share prices nose-dive Monday, raising questions about whether the Fed or other government agencies will have to underwrite more shotgun weddings.
