WASHINGTON (AFP) — The Federal Reserve's emergency weekend move to help ease credit gridlock is likely to be followed by a further cut in US interest rates Tuesday in a bid to stem a mushrooming financial crisis, analysts say.
Yet analysts are debating how much the US central bank can do to alleviate what some argue is the biggest financial crisis in decades, underlined by a spectacular meltdown at Bear Stearns, a Wall Street investment giant that was felled by the subprime real estate collapse.
Rushing to head off a global panic after the Bear Stearns episode, the Federal Reserve moved to keep cash flowing in the financial system with a cut of a key rate and a pledge of aid to the brokerage system Sunday.
The US central bank announced it was cutting by a quarter-point to 3.25 percent its primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition."
The Fed also said it would make liquidity available starting Monday to "primary dealers," which include brokerages that were not previously eligible for direct loans from the central bank. The Fed board also extended the maximum time of discount window loans to 90 days from 30 days.
The moves came just ahead of a regularly scheduled Fed meeting Tuesday where the bank headed by chairman Ben Bernanke is widely expected to cut its base rate further in an effort to get credit flowing.
"These actions demonstrate the extreme lengths, if there was ever any doubt, that the (Fed) Board of Governors are willing to go to," said Bob Eisenbeis, economist at Cumberland Advisors.
The Fed has already slashed its federal funds rate, the base rate for interbank lending, to 3.0 percent from 5.25 percent last September, in an effort to ease housing and credit market stress. But that has not been enough to avert worries about a breakdown in the system.
Still, most see a rate cut as inevitable at Tuesday's Federal Open Market Committee meeting.
"It really doesn't matter whether the Fed goes a half-point point, one point or even more since this is not simply an interest rate issue. It is the liquidity crisis," said Joel Naroff of Naroff Economic Advisors.
"The Fed is in full crisis mode, finally, and while history will determine how well or poorly Mr. Bernanke performed, right now he is doing all he can."
The Fed has been forced into a series of extraordinary actions like Sunday's between its regular meetings amid troubles in various parts of the financial system.
"The Fed obviously didn't think they could wait until Tuesday" to make the announcement," said Robert Brusca at FAO Economics.
"They obviously feared some type of run."
Brusca said the Bear Stearns situation threatened to create panic in markets.
"This is not just Bear Stearns," Brusca said. "People have to wonder about other securities firms. Bear Stearns was at 150 dollars a share a year ago and now it was sold for two dollars. You don't have to be an expert to know something is wrong."
Still, some analysts said it was not clear how much the Fed can do to prop up sagging confidence.
"The Fed has pulled nearly every non-conventional rabbit out of the hat to provide liquidity," said Merrill Lynch economist David Rosenberg.
"The next steps may be to try and prevent a contagion, or a domino impact, and the Fed has responded to this prospect by opening the discount window to the dealer community."
But Rosenberg added that the Fed, which has pumped an estimated one trillion dollars into the banking system, has no magic bullet.
"What we are learning first-hand is that the Fed can't solve all of the world's problems," he said
"The Fed cannot recapitalize the banking sector, nor can it renew investor confidence in the quality of opaque financial sector balance sheets.
"The Fed's role is definitely not to save any particularly weak institution because in the final analysis, the system is built on trust, and there is nothing trustworthy about providing artificial support to asset values. It is absolutely imperative that we don't end up making the same mistakes Japan did in the early- and mid-1990s."
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