Fed steps in to calm markets with billions in cash for banks

WASHINGTON -- The Federal Reserve and the Treasury Department struggled to ease severe credit pressures Monday that threatened to bring down the global economy, including doubling to $900 billion the amount of cash available to banks through a Fed lending program.

But the moves, along with the Fed's promise in a statement to take "additional measures as necessary," did little to calm stressed markets. Expectations for interest-rate cuts rose.

Investors in a market in which participants bet on future Fed moves Monday were pricing in a half-percentage-point cut this month, according to Action Economics. That would reduce the Fed's target for short-term interest rates to 1.5%, the lowest in more than four years.

While a rate cut seems more likely, economists say it's unclear it would have much impact because a loss of confidence has led banks to stop lending, no matter the price. The Fed meets Oct. 28-29 but can cut rates any time.

"The underlying problem is not the federal funds rate," former St. Louis Fed president William Poole told reporters at a National Association for Business Economics meeting. "It is unwillingness of banks to lend. … And I don't think a rate cut has much to do in solving that problem."

First Trust Advisors chief economist Brian Wesbury says, however, that cutting interest rates will help quell the panic.

"The market is pricing in the next Great Depression," he says, advocating a sharp rate cut to 1%. "You have to end the panic before anyone is willing to lend again."

Chicago Fed President Charles Evans in a Monday speech predicted a weak economy into 2009. Evans noted that energy and other commodity prices have fallen rapidly, a condition that could make Fed officials more comfortable about cutting rates. Still, Evans didn't give a clear signal. He called inflation "too high" and worried that "notoriously volatile" commodity prices could quickly rise.

Among the moves Monday, the Fed said it would:

•Raise its limit on 28-day and 84-day loans to banks to $150 billion each. That will increase the amount of loans under the program to $600 billion. The Fed will also increase the amount of cash it will make available to banks in November.