WASHINGTON — The Federal Reserve took another bold step to boost troubled credit markets Tuesday as Chairman Ben Bernanke hinted strongly at another interest-rate cut to spark the U.S. economy and President Bush pushed foreign leaders for a global action plan to rescue banks.
Yet Wall Street was unmoved, as all three major American stock indexes lost another 5 percent of their value as financial market bloodletting continued.
The Dow Jones industrial average fell 508.39 points, or 5.1 percent, to close at 9,447.11. The S&P 500 was off 60.66, or 5.7 percent, to 996.23. The Nasdaq finished down 108.08 points, or 5.8 percent, to 1754.88.
The Dow is down 13 percent in the past five trading days.
Speaking to business leaders in Virginia, Bush said his administration is moving at a breakneck pace to implement a bank rescue plan passed last week by Congress and urged companies to stay positive and take a “we can do it” attitude.
Earlier Tuesday, he phoned the leaders of Germany, France, Italy and Great Britain, trying to persuade them to take confidence-building actions similar to those in the U.S. Britain was receptive, but continental European Union members couldn’t agree on a broad bank bailout plan and instead offered a token increase in deposit insurance. That added to the gloom on Wall Street.
While Bush played the role of comforter, Bernanke broadened the Fed’s emergency lending programs Tuesday morning. He then hinted in a lunch speech that more interest-rate cuts to spark the economy are coming — perhaps late this week at a meeting in Washington of the Group of Seven’s finance ministers — or perhaps when the Fed’s policymakers meet Oct. 28-29.
“In view of the intensifying international dimension to the crisis, it would not be a surprise if a coordinated rate move were announced at G7 meetings on Friday in Washington,” said Peter Kretzmer, an economist with Bank of America, in a research note to investors that predicted a half-point cut from the current 2 percent to 1.5 percent.
The G7 leading industrial democracies often try to coordinate policies. Members are the U.S., the United Kingdom, Canada, France, Germany, Italy and Japan.
Citing an easing of inflation threats and clear signs of a sharp slowdown in economic activity, Bernanke told the National Association for Business Economics that the Fed “will need to consider whether the current stance of policy seems appropriate.”
Cutting the Fed’s benchmark lending rate might lower borrowing costs for consumers and business, but the problem today isn’t high rates; rather, it’s the fact that banks can’t or won’t lend, and fear reigns in the world of finance.
To address the massive loss in confidence among lenders Bernanke moved before markets opened Tuesday to announce that the Fed would begin buying the short-term debt issued by major domestic and foreign corporations based in America.
The decision puts the Fed into another area traditionally outside its domain, backstopping corporations that are not in the banking sector. The action was prompted by the largest monthly drop ever, $153.5 billion in September, in a market once considered among the safest investments.
Big U.S. corporations such as General Electric, Caterpillar and other multinational companies issue commercial paper to raise money to pay for their inventory and cover payroll. This paper, as it’s known, actually is a 30-day promissory note that works like an IOU.
Until recently, such notes were snapped up by banks and money market funds.
But as the global credit crisis widened, banks weren’t willing to invest in commercial paper, preferring to ride out the growing financial storm by sitting on cash instead of lending it. In the past three weeks alone, the commercial-paper market has shrunk by more than $200 billion.
So, using its authority as the lender of last resort, the Fed said it would buy commercial paper from corporations and do so through April 30. The Fed’s action was open-ended, meaning it will be based on demand and without a fixed price tag on it.
“The Federal Reserve’s move should go a long way toward unlocking the commercial-paper market. It had become too clear the strategy of providing reserves to banks with the hope those banks would lend to each other and to corporate borrowers had failed,” said Howard Simons, an investment strategist for Bianco Research in Chicago. “The Federal Reserve, by lending directly, has removed the very real possibility that large high-quality corporate borrowers might have had to close down operations for lack of short-term liquidity.”
In his lunch speech, Bernanke defended a long string of aggressive Fed moves as necessary given “a problem of historic dimensions” and because delay would only make things worse.
“We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased,” he said.
