Sunday, March 16, 2008

Fed Cuts Lending Rate to Financial Institutions to 3.25%

WASHINGTON -- Federal Reserve Chairman Ben Bernanke said new steps announced by the central bank Sunday should help squeezed financial institutions get cash infusions-- a fresh effort to provide relief to a spreading credit crisis that threatens to plunge the economy into recession.

The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

"These steps will provide Finance Programs with greater assurance of access to funds," Bernanke told reporters in a brief conference call Sunday evening.

The new lending facility will be available to financial institutions on Monday.

It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25% and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the loans.

The steps are "designed to bolster market liquidity and promote orderly market functioning," the Fed said in a statement. "Liquid well-functioning markets are essential for the promotion of economic growth."

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase & Co. ( will acquire rival Bear Stearns Cos. The deal valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

Treasury Secretary Henry Paulson said he was pleased by Sunday's developments.

"Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets," he said.