Fed drops lending rate a quarter-point

updated 12:16 p.m. ET March 17, 2008

WASHINGTON - The Federal Reserve is urgently moving to contain a deepening credit crisis and restore confidence in panicked financial markets by becoming a lender of last resort for Wall Street investment houses, which were able to secure short-term emergency loans beginning Monday.

On Wall Street, investors remained somewhat skittish. The Dow Jones industrials, which were down more than 175 points in early trading, moved into positive territory later in the morning. Trading on world markets was down sharply.

President Bush rushed to strike a note of calm to the turbulent situation on Monday morning, hailing the Fed’s action and saying: “We’ve taken strong decisive action.” The president spoke after meeting at the White House with Treasury Secretary Henry Paulson and other members of his economic team. “We’re in challenging times,” Bush said.

The central bank, in an extraordinarily rare weekend move, took the bold action Sunday in an attempt to calm the markets. It also approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately.

“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment houses. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

The Fed’s actions come as fears have spread that other financial houses could also be on shaky ground.

“It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown,” Richard Yamarone, an economist at Argus Research, said Sunday evening.

Yet anxiety persisted. On world financial markets, Asian stocks plunged Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off and European stocks fell in early trading. The Bank of England moved Monday to inject an extra $10.1 billion into its financial system to provide relief.

Oil prices hit a record in Asian trading as the value of the dollar continued its free fall.

“There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted,” said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.

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