Worldwide interest rate cuts on the way?


No doubt with corresponding central bank intervention against the price of gold.

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Fed May Need to Dip Into Toolbox Further as Congress Scrambles

By Scott Lanman and Steve Matthews
Bloomberg News
Tuesday, September 20, 2008

The Federal Reserve may need to consider dipping further into its toolbox as Congress tries to revive legislation aimed at rescuing banks.

One of the main remaining options for Fed Chairman Ben S. Bernanke to cushion the economy and shore up confidence in financial markets is cutting the benchmark interest rate, according to economists. A reduction could be coordinated with other central banks, they said.

U.S. stocks plunged the most since the 1987 crash yesterday after the House of Representatives rejected a bill containing Treasury Secretary Henry Paulson's $700 billion plan to buy distressed debt. The Fed has already lowered its main rate 3.25 percentage points since the start of the crisis and set up $1.4 trillion in emergency borrowing for banks and other institutions.

"It certainly increases the chance of us going to 1.50 in short order" from the current 2 percent benchmark rate, said Keith Hembre, chief economist at Minneapolis-based FAF Advisors Inc., which oversees $112 billion. "Unemployment is likely to continue rising, I think the inflation pressures are dissipating very quickly, and you've got turmoil in the financial markets."

"Those all argue for another rate cut," said Hembre, a former Minneapolis Fed researcher.

Besides lowering rates, the Fed may not have many options beyond further expanding emergency lending programs or creating new ones, using the central bank's balance sheet, economists said.

... 'Get Something Done'

The bailout legislation -- backed by Bernanke -- isn't dead yet, and Paulson and congressional leaders are still working to pass it after House members rejected it by a 228-205 vote. The Senate may take up the bill as early as Oct. 2. "We need to work as quickly as possible. We need to get something done," Paulson said yesterday after meeting with President George W. Bush.

Hours before the House vote, the Fed said it will flood banks with cash, pumping an additional $630 billion into the global financial system. The Term Auction Facility, the Fed's emergency loan program for commercial banks, will expand by $300 billion to $450 billion.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide, showing further coordination with counterparts including the European Central Bank, the Bank of England and the Bank of Japan.

"A globally coordinated rate cut is an option that would be appropriate under the circumstances," said Brian Bethune, chief U.S. financial economist at Lexington, Massachusetts-based Global Insight, who says a 50 or 75 basis point cut is possible. "You get a crisis like this, and the Fed has to move."

... Interest on Reserves

A provision in the rescue bill would allow the Fed to pay interest on reserves that banks store with the central bank, making it easier to pump funds into the financial system without pushing down the benchmark interest rate.

The central bank is likely to continue to push Congress and the U.S. Treasury to broker a fiscal solution to help ailing financial institutions and resist calls to use its own balance sheet for rescues.

In March, the Fed agreed to loan $29 billion against a pool of securities to facilitate Bear Stearns Cos.'s sale to JPMorgan Chase & Co. This month, the central bank lent $85 billion to insurer American International Group Inc. to avert default.

Bank turmoil continued yesterday as Citigroup Inc. agreed to buy banking operations of Wachovia Corp. for about $2.16 billion in a deal that the Federal Deposit Insurance Corp. helped broker. European governments were forced to rescue four banks in recent days.

... Wagers on Cut

Futures traders yesterday put a 66 percent chance on a half- point rate cut at or before the Fed's next regular meeting on Oct. 28-29, up from 32 percent on Sept. 26 and zero a week ago. The Fed's last cut in the overnight lending rate outside of a scheduled meeting was in January, when the central bank lowered the rate by 0.75 percentage point.

The Fed may wait for Congress to have another chance to pass a bill this week before lowering rates, economists said.

Yet so far the Fed's actions have failed to prevent a full-blown crisis, and there's no guarantee that additional actions will succeed.

"What we know is that the flow of credit has been dropping dramatically," said former Fed Governor Lyle Gramley, now senior financial adviser at Stanford Group Co. in Washington. "The Fed could lower the funds rate to zero. But if the credit markets are frozen up because people are in a state of panic, that's probably not going to do any good."

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