The Federal Reserve's New Financial Lifelines
Tuesday, October 07, 2008PAUL KANGAS: Another dismal day of heavy selling on Wall Street. It came despite unprecedented action by the Federal Reserve in the corporate debt market, and hints by Fed Chairman Ben Bernanke of a possible interest rate cut. The Dow plunged 508 points and the NASDAQ tumbled 108. Investor jitters overshadowed several Fed developments, including a plan to buy commercial paper and hints an interest rate cut could be in the works. We have two reports tonight, looking at the Fed's latest moves and the debate over rates. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Having already propped up banks, Wall Street, and the nation's largest insurance company, Federal Reserve Chairman Ben Bernanke announced much of the rest of corporate America will now be getting a financial lifeline. The Federal Reserve, Bernanke said, would act as buyer of last resort for the short-term debts of corporations. In the financial world, that debt is called commercial paper.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE BOARD: Disruptions in the commercial paper market and the tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses, such as payroll and inventories.
GERSH: The total amount of commercial paper eligible for the backstop is $1.3 trillion. Senior Fed officials say the new program will be substantial, though they did not offer a dollar figure. Companies that use the Fed backstop would have to pay a fee, or offer collateral or other guarantees that taxpayers will not end up losing money. Any purchases will be limited to the amount of commercial paper a company had outstanding in August. Since only highly rated companies like Boeing (BA), GE (GE) and JPMorgan (JPM) are eligible for the Fed backstop, analysts say the risk to taxpayers should be low. Jeff Glenzer represents corporate treasurers.
JEFF GLENZER, MANAGING DIRECTOR, ASSOCIATION FOR FINANCIAL PROFESSIONALS: If this program works the way it's intended to do, which is to restore confidence in the commercial paper markets, the extent to which the Federal Reserve actually has to provide that backstop may be very minimal.
GERSH: With credit conditions tightening, unemployment rising, and consumers throwing in the towel, the Fed chairman described the economy as "subdued," and he hinted more Fed medicine is likely to come soon in the form of a cut in interest rates.
BERNANKE: The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened, and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.
GERSH: A cut in interest rates normally helps the economy by making loans cheaper. But if even the best companies can't borrow in today's markets, analysts worry the usual rate cut magic may lose much of its power. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller in New York. The rate debate took center stage on trading floors today. There was widespread disagreement on the wisdom and timing of a rate cut by the Federal Reserve. Merrill Lynch's Drew Matus believes aggressive rate cuts by the Fed would help boost economic growth. He believes the Fed should move before its next scheduled meeting, October 28th and 29th, in order to maximize impact.
DREW MATUS, SENIOR ECONOMIST, MERRILL LYNCH: Moving aggressively now might reinforce the idea that they are, in fact, moving to get ahead of the situation instead of simply reacting to it.
MILLER: However, others say a move by the Fed would be nothing more than a symbolic gesture. Even supporters warn a U.S. rate cut probably won't have much impact, unless other countries cut their rates, too.
MATUS: This is not one of those situations where the U.S. government can simply sit back and solve the problem in the United States and hope that the rest of it goes away. . It has got to be solved within the United States and also abroad in order for it to be fully effective on a global scale.
MILLER: There have been calls for massive coordinated interest rates cuts by central banks around the world. Although there has been cross-border cooperation to inject liquidity into the global financial system, economist Dean Maki says lowering interest rates is another story.
DEAN MAKI, CHIEF U.S. ECONOMIST, BARCLAYS CAPITAL: It would be another large step for the Fed and other central banks to coordinate monetary policy. They are supposed to make monetary policy according to their own domestic economies. And it would be very unusual to cut rates in a coordinated way.
MILLER: But nearly everyone agrees rate reductions alone will not cure financial and economic woes. Economists would also like the Fed to do more to encourage inter-bank lending.
MAKI: Banks are less willing to lend to other banks than has been the case in the past. It's not clear that a rate cut really addresses that issue directly. But it does provide some stimulus to the economy, relative to not cutting rates, which is why we think the Fed will choose that route.
MILLER: If there is some global coordination to lower rates, experts say it could come as soon as Friday's G-8 meeting. They also think moves could be on the agenda at the annual meeting of the International Monetary Fund this weekend. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
