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Fed Becomes Increasingly Aggressive in Crisis

Whether the Reserve Board's plans to inject $200 billion into the capital market will be trumped by the fallout from the Bear Stearns rescue remains to be seen.

By Erika Morphy | Updated on March 16, 2008

Last week the US stock and capital markets careened from relief to fear again from the week’s events. These, of course, were predicated by the Federal Reserve Bank’s plan, announced last Tuesday, to inject $200 billion into the financial markets (http://www.globest.com/news/1112_1112/washington/168990-1.html) by taking mortgage-backed securities as collateral; and Friday’s surprise news that the Fed, with the assistance of JPMorgan Chase & Co., would lend the struggling Bear Stearns the necessary funds to plug a cash shortfall.

Not that the Bear Stearns crisis has ended; the extend of the investment bank’s red ink is unclear and the episode has shaken to the core investors’ confidence in an already shaky financial system. Events that the markets will be following closely this coming week are, not surprisingly, JPMorgan’s negotiations to acquire the bank, and to a lesser extent, how deeply will Fed Chairman Ben Bernanke cut the target for short-term interest rates on Tuesday. It is widely expected that the cut will be significant – by at least three-quarters of a percentage point to 2.25%.

The magnitude of credit crisis has spread beyond even the wildest scenarios imagined last August when it began. The Federal Reserve, though, is heartening observers by pushing the envelope on the tools and policies that are available to it.

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