Fed scales back emergency lending programs
WASHINGTON -- The Federal Reserve moved Thursday for the first time to scale back several of the emergency lending programs it launched last fall at the height of the financial crisis.
The central bank's announcement came the same day that Fed Chairman Ben Bernanke on Capitol Hill disputed accusations that he pressured Bank of America into acquiring Merrill Lynch in a deal that ultimately cost taxpayers $20 billion.
The Fed will allow one program intended to support money market mutual funds — which hasn't been used — to expire Oct. 30. And it's reducing the maximum it will lend to banks under two other programs.
The Fed has pumped trillions of dollars into commercial and investment banks through an alphabet-soup of emergency programs, after struggling banks hoarded cash and refused to lend to each other and consumers.
The central bank on Thursday extended until Feb. 1, 2010, five lending programs that had been slated to expire Oct. 30 .
In addition, the Fed is buying $1.75 trillion in mortgage-backed securities, Treasury bonds and other debt in an effort to keep interest rates low. The extended programs include swap lines with more than a dozen foreign central banks that enable them to provide dollars to their financial systems in exchange for giving the Fed foreign currencies.
The Fed said the moves reflect its view that "financial markets have improved in recent months, but market functioning in many areas remains impaired" and likely will be "strained for some time."
Interest rates that banks charge to lend to each other soared last winter as large institutions such as Citigroup reported mounting losses on real-estate related investments. But those rates have recently fallen to record lows.
The Fed's announcement Thursday is "a gentle backing away" from its lending to the financial sector, said Michael Feroli, senior economist at JPMorgan Chase. But its lending programs "were declining on their own," he said.
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