Fed drops lending rate a quarter-point

President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

Democrats accused Bush of not doing enough to relieve the situation.

“Now we are in the soup and we better get ourselves out of it before the consequences get drastic,” Democratic presidential contender Hillary Rodham Clinton told reporters.

Paulson said Sunday, “I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets.”

The new lending facility — described as a cousin to the Fed’s emergency lending “discount window” for banks — is geared to give major investment houses a source of short-term cash on a regular basis — if they need it.

That’s important because those big investment houses have key roles in the financial system and if one fails or is having difficulty it could put the whole financial system in jeopardy, said Mark Zandi, chief economist at Moody’s Economy.com. These big investment houses have complex relationships with many players in the system, including hedge funds, commercial banks and others.

The lending facility will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral — including investment-grade mortgage backed securities — will be accepted to back the overnight loans.

The “discount” rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn’t apply to individual borrowers.

The Fed’s actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street.

The action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least three-quarters of a percentage point on Tuesday.

The Fed said in a statement that the steps are “designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth.”

Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.

The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets, according to JPMorgan.

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