US Fed takes emergency steps to help financial system

The US Federal Reserve announced two emergency measures on Sunday to safeguard the financial system, lowering the discount rate it charges on direct loans to banks and announcing a new programme to lend directly to other big financial firms.

The central bank said in a surprise statement that it cut the discount rate to 3.25 per cent from 3.5 per cent, effective immediately, which puts that rate just a quarter point above the interbank overnight federal funds rate, the Fed's primary policy tool.

It also said it was setting up a new lending programme under which so-called primary dealers could borrow directly from the Fed at the discount rate.

'The Federal Reserve in close consultation with the Treasury is working to promote liquid, well functioning financial markets, which are essential for economic growth. To that end we took two steps today,' Fed Chairman Ben Bernanke said in a rare conference call with reporters. 'These steps will provide financial institutions with greater assurance of access to funds.'

It also said it was setting up a new lending programme under which so-called primary dealers could borrow directly from the Fed at the discount rate.

'Liquid, well-functioning markets are essential for the promotion of economic growth,' the Fed said.

The central bank said the new lending facility for the primary dealers, big Wall Street firms with which it deals directly in financial markets, would be open for business on Monday and would be kept in place for at least six months.

The central bank said the new lending facility for the primary dealers — big Wall Street firms with which it deals directly in financial markets — would be open for business on Monday and would be kept in place for at least six months.

It is aimed 'to improve the ability of primary dealers to provide financing to participants in securitisation markets',the central bank said. The loans extended under the new programme can be backed by a broad range of investment-grade debt securities as collateral.

Both actions were approved unanimously by the Fed's Board of Governors.