Fed's moves fail to ease jitters; Treasury yields drop, building momentum for interest-rate cut

To ease a worsening credit crunch, the Fed on Friday cut the interest rate it charges on direct loans to banks from its "discount window" to 5.75% from 6.25% and took other steps designed to increase the flow of cash to the U.S.'s financial system. While the Fed didn't alter the...

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Bibliographic Details
Published inThe Wall Street journal Asia
Main Author Serena Ng, Greg Ip and Shefali Anand
Format Newspaper Article
LanguageEnglish
Published Hong Kong Dow Jones & Company Inc 22.08.2007
Subjects
Discount rates
Federal Reserve monetary policy
Institutional investments
Interest rates
Loans
Money markets
Mortgages
Subprime lending
Treasuries
Treasury bills
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Summary:To ease a worsening credit crunch, the Fed on Friday cut the interest rate it charges on direct loans to banks from its "discount window" to 5.75% from 6.25% and took other steps designed to increase the flow of cash to the U.S.'s financial system. While the Fed didn't alter the key federal-funds rate, its target for short-term interest rates, it said the "downside risks to growth have increased appreciably" and it was "prepared to act." It made no mention of inflation, its principal concern for the past two years. "I told him, 'This is all about safety. If we break the buck, we will lose our bonus and may get fired,'" said Mr. [Michael Cheah], adding it would be better to invest in Treasurys. The manager decided to put the money in a short-term Treasury repurchase loan that paid 4.3%. Even so, the Fed hinted Monday that it is expecting a sizable response by banks. It said it would redeem $5 billion of maturing Treasury bills in its portfolio to offset other factors that could expand its balance sheet, such as "discount-window borrowings." Traders took that as evidence the Fed expects borrowings of several billion dollars in coming days. The planned move has the added benefit of freeing up more Treasury bills for the public to buy. The Treasury Department helped by offering a larger-than-expected $32 billion in new four-week Treasury bills at its auction yesterday.