Fed piecing together emergency rescue plan

Straits Times ^ | Updated April 8, 6.00 am (Singapore time)

[DeaconBenjamin]

WASHINGTON -- Confronting new fears of recession, the Federal Reserve is refining an emergency economic rescue plan that includes further interest rate cuts and billions of dollars in extra cash for the banking system.

The Fed's effort would be aimed at pulling the country out of a nosedive that has seen 465,000 jobs evaporate in just the past two months, raising fears among economists that the weak recovery from the 2001 recession is in danger of stalling out altogether.

'Clearly, the Fed is in uncharted territory,' said economist David Jones. 'I think they will try some experimental moves.'

One key element hasn't been used successfully in a half-century.

Based on comments by Federal Reserve Chairman Alan Greenspan and other Fed officials, the central bank is expected to move beyond its traditional buying and selling of short-term Treasury securities held by banks to the direct purchase of longer-term securities in an effort to influence long-term interest rates.

Also, Fed officials have indicated they are prepared in the event of an unexpected shock to the system to lend massive amounts of money directly to commercial banks to make sure that financial markets do not freeze up.

And as a third policy option, Fed officials have indicated they would explicitly state that if the federal funds rate is moved below its current 41-year low of 1.25 per cent, it is likely to stay at the lower level as long as needed to get the economy on its feet -- which would help investors' worries about a sudden jump in interest rates down the road.

The fact that Fed officials have been so open in discussing these options underscores the need the central bank sees to restore investor confidence that has been shaken by the fact that the Fed's aggressive two-year campaign to cut short-term rates has yet to produce a sustainable economic recovery.

The Fed's target for the federal funds rate, the interest that banks charge for overnight loans, is now at a 41-year low of 1.25 per cent. -- AP

[DeaconBenjamin]

Didn't see this anywhere.

[DeaconBenjamin]

Please ping your list, if this is new.

[AdamSelene235]

'Clearly, the Fed is in uncharted territory,' said economist David Jones. 'I think they will try some experimental moves.'

Oh goody, I can't wait.

[kellynla]

The Air Force may have taken care of the problem. One dead Saddam. Just check out the Futures Market.

[sourcery]

I was about to post it when I saw you beat me to it. Congratulations :-)

[AdamSelene235]

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

-Federal Reserve Governor Ben S. Bernanke

Why, oh why, do I have to share a planet with this man?

[sourcery]

The Fed obviously does not believe its own hype.

[plusone]

Interesting info, it shows how desperate the Fed has become. The economy is keeping its head above water, but just barely. And this is with extremely low rates. The Fed has cut rates about 12 times in a row, and still no recovery. This is one half of a Keynsian solution to a recession, the other half being increased gov't spending. And we have this in spades, the deficit is how much, 300 billion? No, with the fed funds overnight rate at 1.25%, further cuts won't stimulate the economy.

[eternity]

Do what Japan did. Not.

[arthurus]

interest rate cuts and billions of dollars in extra cash for the banking system

The classic solution and the worst thing the government can do. It only combines Inflation with Recession for a truly miserable economy.

[Ronzo]

300 Billion...is play money. If I remember correctly, I think the deficit was up to TWO TRILLION before the roaring 90's helped bring it under control.

It's going to have to surpass ONE TRILLION at least before the big "G" is felt...

[elbucko]

Why, oh why, do I have to share a planet with this man?

I agree. He needs to read the transcriptions of what he says.

[TLBSHOW]

How about the full tax cut with no witholding tax from American workers for the next 6 months, now that is all that is needed! Hey we can forgive countries for billions lets do what is right with our own!

Nuf said!

[ModernDayCato]

Hey geniuses,

LOWER TAXES AND STOP SPENDING SO MUCH MONEY.

It's pretty simple, and no one has the b@lls to actually do it (including everybody's hero, GW Bush). They can print all the money they want, but it ain't doin' nothin'.

[irish_links]

"...No, with the fed funds overnight rate at 1.25%, further cuts won't stimulate the economy....."

plusone:

Lowering the target rate for federal funds in today's economy doesn't amount to much more than window dressing. Injecting high powered money into the banking system by way of outright purchase of term Treasury notes (a so-called coupon pass) is another matter entirely. It is in the baldest sense the Fed creating credit. It merely credits its own account and uses the funds to purchase assets held by commercial banks.

The effect of a coupon pass is to immediately increase the amount that banks can lend by a multiple of the actual credit creation.

End result: virtually immediate increase of economic activity, if the conditions are supportive of same. It's not a panacea, but if timed properly can be a real booster shot to the economy that a showy funds rate decrease could never match.

Downside: potentially inflationary. Once you've let the credit horse out of the barn, its hard to get it back in. The liquidity has to slosh somewhere, and it it doesn't inspire enough real investment and production you get inflation.

For the record, I think the timing is right. And, I'll bet St. Lawrence Kudlow and most of the Supply Side fraternity agree with me.

[elbucko]

with no witholding tax from American workers for the next 6 months,..

The Democrats would rather die first, than give this example of how much the Gov't rips the taxpayer off before his check is cut.

[sourcery]

How about the full tax cut with no witholding tax from American workers for the next 6 months

That wouldn't hurt. But completely repealing the income tax would be much more likely to have the desired effect. Unfortunately, even the policy you suggested is unlikely to be implemented until things get noticeably worse, and then only if the Republicans can successfully blame DemonRat obstructionism for the worsening situation.

[plusone]

Aren't you talking about the national debt, not the yearly deficit?

[plusone]

Having the Fed purchase Tbills directly won't help the banking system or the economy if people are unwilling to borrow, even at very low rates. Without new loans, the multiplier effect won't kick in, and no new credit money will be created.

[Ronzo]

Aren't you talking about the national debt, not the yearly deficit?

Oops...Yes, that is correct. My goof...

But anyway, even though it hurts every conservative bone in my body to say this, government expenditures have to increase DRAMATICALLY. I just hope they spend it on subs, planes, tanks and national parks.

I simply don't know of anyhting else that can be done...other than just waiting this thing out...and it will probably get much worst before it gets better, if left to it's own devices.

But I'm open to suggestions...