Fed Piecing Together Emergency Economy Plan
By Martin Crutsinger, Associated Press
"Clearly, the Fed is in uncharted territory," economist David Jones said. "I think they will try some experimental moves."
Comments by Federal Reserve Chairman Alan Greenspan and other Fed officials indicated that the central bank is expected to move beyond its traditional buying and selling of short-term Treasury securities held by banks to the direct purchase of longer-term securities in an effort to influence long-term interest rates.
Also, Fed officials have indicated that they are prepared -- in the event of an unexpected shock to the system -- to lend massive amounts of money directly to commercial banks to make sure that financial markets do not freeze up.
And as a third policy option, Fed officials have indicated that they would explicitly state that if the federal funds rate is moved below its current 41-year low of 1.25 percent, it is likely to stay at the lower level as long as needed to get the economy on its feet -- which would help ease investors' worries about a sudden jump in interest rates down the road. The federal funds rate is the interest that banks charge for overnight loans. The fact that Fed officials have been so open in discussing these options underscores the need the central bank sees to restore investor confidence that has been shaken by the fact that the Fed's aggressive two-year campaign to cut short-term rates has yet to produce a sustainable economic recovery.
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