The Federal Reserve's $200 B Injection
Tuesday, March 11, 2008PAUL KANGAS: The Federal Reserve unleashed the bulls on Wall Street today. The Dow surged 416 points or over 3.5 percent, for its biggest one-day percentage gain in five years and the NASDAQ jumped 86 points or 4 percent. Stocks soared after the central bank moved to ease tight conditions in the credit market by offering to take mortgage backed assets that are hard to sell in exchange for easy-to-trade treasuries. As Darren Gersh reports, some hope the move will unleash or ease I should say the credit crunch brought on by plunging home prices.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street loved the size and global scope of the Federal Reserve's financial injection -- up to $200 billion. Investment advisor Hugh Johnson says traders believed the money would help break through the financial gridlock gripping credit markets.
HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS: The basic felling on Wall Street is that this is both an imaginative move by the Federal Reserve and one that is going to yield positive results. It's going to lead, hopefully, to an increase in bank lending. And, of course, for an economy that runs on money and credit, that's an extremely positive outcome.
GERSH: The rally began after the Fed announced early this morning that it was creating a new program to allow 20 of the nation's biggest banks to borrow U.S. Treasuries for up to 28 days. Those Treasuries are easy to trade, allowing banks quick access to cash. As collateral, the Fed would accept assets that investors are now afraid to hold, including mortgage- backed securities from Fannie Mae and Freddie Mac and other mortgage securities that are rated triple-A. Those securities have been hit hard by the collapse of the housing market. Economist Adam Posen says the Fed was careful to target this relief.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: Effectively, they are saying to banks, we know you've good stuff out there you can't turn over; we're going to let you turn it into temporary cash. Think of it as payday lending for the big banks.
GERSH: The Fed also tripled agreements with European central banks to make it easier for banks overseas to get access to dollars. Financial markets had also been expecting a 3/4 of a percentage point interest rate cut at the Fed's next meeting. Vince Reinhart is a former top staffer at the Fed. He says today's announcement of an aggressive credit injection means the Fed will probably cut just half a percentage point on March 18.
VINCENT REINHART, SR. FELLOW, AMERICAN ENTERPRISE INSTITUTE: These are ways to use its balance sheet aggressively, to deal with the financial market problems, without adjusting the policy rate, which has big macro- economic consequences.
GERSH: If credit market conditions begin to ease, Hugh Johnson hopes the economy will begin to recover, which would help make today more than just another in a long string of one-day rallies.
JOHNSON: I don't want to say we've seen the worst of the downside, but this is an important enough change or move by the Federal Reserve that it could lead to some stability over time in the equity markets.
GERSH: With today's announcement, the Federal Reserve has now committed close to half of its assets to easing the credit crunch. And it made clear today it could do substantially more, if needed. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
