US central bank considering how to bolster lending power: Report
WASHINGTON - WORRIES about a deep recession - not a shallow one - drove the United States Federal Reserve to slash a key interest rate last month, according to the minutes of the Fed’s meeting.
Even as the Fed battled in an almost unprecedented fashion to stem a widening credit and housing slump, some members fretted over the possibility of a ‘prolonged and severe’ economic downturn. It was in that environment that they voted to cut the Fed’s most important interest rate by three-quarters of a percentage point to 2.25 per cent. That action capped the most aggressive Fed intervention in a quarter-century.
Some Fed policymakers thought that such a widening recession could not be ruled out given the ‘further restriction of credit availability and ongoing weakness in the housing market’, according to the minutes made public on Tuesday.
Yesterday, the Wall Street Journal reported that the Fed was looking at contingency plans for bolstering its lending power in case other measures to unfreeze the credit markets fail.
Nothing is imminent since the Fed still has room on its balance sheet for additional lending.
One option would be to have the Treasury borrow more money than it needs to fund the government and keep the proceeds on deposits at the Fed, the report said.
Other options include issuing debts in the Fed’s name, with the proceeds used to make loans or purchase other assets; and, asking Congress for immediate authority for the Fed to pay interest on commercial bank reserves rather than wait until a 2006 law permits it in 2011, the Journal said.
The Fed has been urgently moving to prevent the trio of economic woes - housing, credit and financial - from plunging the US into a deep recession.
On the other hand, with soaring energy prices and high food costs, policymakers realise that they cannot afford to let inflation get out of control either.
Some Fed officials were ‘concerned that inflation expectations could potentially become unhinged’, according to the minutes.
If people, investors and businesses expect prices to rise sharply, they will act in ways that will make inflation worse.
Still, many economists believe the Fed will lower rates again at its next scheduled meeting on April 29 to 30, in light of the latest employment data showing the economy lost jobs for the third month in a row in March.
All told, the US has lost 232,000 jobs in just three months.
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