As per my previous post about the Federal Reserve lowering rate, as of this morning (US time) they have indeed lowered their rate to as low as 75 basis points. Although, the expectation in the market is around 100 to 200 basis points in the view to shock the market and induce the economy - 75 basis points is still relatively high and in fact higher than what they have provided recently.

As a matter of fact, the Federal Reserve has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became a target of policy in the late 1980’s.

The current lending rate for the Federal Reserve is 2.25 percent.

This created a rally in the markets as the Dow is up 356.09 points (as of this writing). The ASX 200 futures is up 104.9 points, the Nikkei is up 176.65 points (all current as of this writing).

Expect to get a spurt on the local markets because of this announcement. On technical analysis, there are some good opportunities for short-term gains. Fundamentally, this action is an attempt by the officials to prop up the faltering economy and restore faith in the US financial system. In a way, this is telling something about the US economy as the Federal Reserve is trying their best to aggressively tackle this ongoing issue.

Will this market hold higher? Only time will tell…

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Many in the market are expecting that the Federal Reserve will make another rate cut as a reflection of the deteriorating state of the US economy.  In a desperate attempt to save an economy in crisis, it is expected that this cut could be as large as 50 to 200 basis points.  Although, it is more likely it will be around the 50 - 75 basis points mark.

There is a general feeling with some market watchers that the Fed may take an aggressive approach and shock the economy into action.  As President Bush declared, “we’re in challenging times”.

Mark Zandi, a chief economist at Moody’s Economy.com also states that: “The Fed is on high alert — something you don’t see but once every quarter century; maybe, in this case since the Great Depression.  This is a very unusual period.”

At the moment, the Fed is fighting multiple battles at once, a housing collapse, a severe credit crunch and a wall street turmoil which feeds on each other creating a vicious circle that may be hard for the Fed to break.

This may not be the end of it - if it does help the economy, it may only be temporary and a rate cut may not be enough to get the economy back on track.

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The US Federal Reserve, who is struggling to contain economic confidence in the credit markets will for the “first time” lend treasuries in exchange for debt that includes mortgage backed securities.

In a statement made in Washington, the Federal Reserve, plans to make up to $200B available through weekly auctions. On conditions of anonymity, some officials said that this amount may also be increased - as needed.

The Fed also coordinated the effort with Europe and Canada who also plans to inject up to $45B into their banking systems.

US stocks rallied on optimism that this action will help relieve the condition in the credit markets. As of this writing, the Dow increased 261.90 from previous days closing.

In effect, this shows the Fed’s continuing concern in the credit markets and it is doing as much as it can to help increase liquidity in the financial markets and help relieve some pain in the US mortgage securities.

Terms

The Fed said it will lend Treasuries for 28 day periods in return for debt which includes AAA rated mortgage backed securities sold by Fannie Mae, Freddie Mac (two of the major US mortgage securities firm) and by other banks. It will be held under a new program called, the Term Securities Lending Facility, to so called primary dealers and to the main banks and securities firms that trades directly with the central bank.

This would allow dealers to switch debt that is less liquid for US government securities that are easily tradable. Officials said that asset values will be discounted in exchange for treasuries, though the details are still under construction.

Other Central Banks

In line with the US Federal Reserve, the European Central Bank (ECB) will lend up to $15B for 28 days. The Bank of England will offer $20B three month loans March 18 and hold another auction April 18. The Bank of Canada plans to purchase $4B of securities for 28 days.

The Fed will not make outright purchases for mortgage securities as buying it directly would affect prices.

In laymans terms:

This means that with US Federal Reserve injecting up to $200B with the intention to increase as needed, the ECB injecting up to $15B for 28 days, the Bank of England offering three-month loans and the Bank of Canada who intends to purchase $4B of securities for 28 days - would help increase liquidity and maintain global economic growth.

This has already created a rally in the US markets and Europe. Overnight the Australian index futures increased around 175.3 points and the Japanese futures increased about 315 points.

This may be really good short-term but long-term is it really good for the local and global economy?

In the next post, I will talk about where the Australian banks are at the moment.

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