Tuesday, April 8, 2003
Fed making emergency plans for economy
By MARTIN CRUTSINGER
THE ASSOCIATED PRESS
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 nose
dive 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," economist David Jones
said. "I think they will try some experimental moves."
One key element hasn't been used successfully in a half-century.
Based on comments by Fed 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 percent, 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 percent.