By Jennifer Yousfi
New measures aimed at boosting liquidity in the credit markets announced by the U.S. Federal Reserve yesterday (Wednesday) diminished chances that Chairman Ben S. Bernanke and the other members of the Federal Open Market Committee would vote to raise interest rates at its next meeting.
The Fed will extend its emergency lending program to Wall Street investment banks, first instituted in March, through the end of January 2009. Despite lowering the Federal Funds rate seven times – ultimately lowering it to 2.0% from 5.25% — since the Fed began its easing campaign in September 2007, the cost of borrowing between banks remains high as worries of counterparty risk abound.
"The U.S. is pulling out all the stops here to make sure we don't have a terrible downturn or a collapse in the financial system," Allen Sinai, chief global economist at Decision Economics in Boston, told Bloomberg News. "There isn't anything else the Federal Reserve can do but to keep pumping liquidity into the system."
The European Central Bank (ECB) also announced similar measures yesterday. In addition to extending the window of borrowing, the respective central banks will also lengthen the term of the short-term loans to 84 days from 28 days.
The first auction for the new 84-day loan is scheduled for Aug. 11. Thereafter, auctions will be held on a biweekly basis.
The move indicates that the Fed’s main concern remains risk to economic growth, despite accelerating inflation in both the United States and 15-nation Eurozone.
"I think it is highly unlikely that they would raise rates under these conditions and given what they are trying to accomplish with these facilities," Brian Bethune, chief U.S. financial economist at Global Insight in Lexington, Mass., told Reuters.
Analysts noted that inflation concerns would really have to ramp up to get the Fed’s attention, given the current devotion to providing as much enticement for economic expansion as possible.
"Today's announcement does not prevent tightening under all circumstances, but it does indicate that the inflation threat has to be substantial enough to overcome a still questionable outlook for growth," wrote former Fed Board Governor Laurence Meyer, who is now with Macroeconomic Advisers, Reuters reported.
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Fed Extends Emergency Loan Programs Through January
Fed, ECB extend emergency liquidity program