THE DEEPENING sense of financial crisis yesterday forced the US Federal Reserve into new emergency action to help ease the pressures on the banking system.
In a move it said had been discussed with other central bankers, the Fed offered to lend banks $200 billion for a month after a week that saw fresh turmoil in global credit markets, growing concerns about mortgage-backed securities and more data pointing to a US recession.
Tensions in European money markets could prompt the European Central Bank to step up its own liquidity operations.
The move drew the sting from the dire employment figures - released just minutes after the announcement - that showed the loss of 63,000 US jobs in February, leading many economists to conclude the US is in recession.
At midday, the S&P 500 index was down 0.6 per cent. Oil futures hit a new record, although the dollar recovered from early losses.
Private-sector employment, which has declined for three months in a row, fell by 101,000. The market moved to price in a 100 per cent probability that the Fed will cut interest rates by 75 basis points on March 18th.
Bruce Kasman, chief US economist at JPMorgan Chase said: "It now looks like we are in a recession." However, Carlos Guttierez, US commerce secretary, said: "But this should be our worst quarter for the year."
Meanwhile, Boston Consulting Group released a survey showing more than half of US business executives believe the country is in recession or will be within six months.
The Fed is increasing its loan auctions to commercial banks to $100 billion and unveiling another $100 billion in a new one-month repurchase operation primarily for investment banks. By offering $200 billion in four-week loans, it is in effect offering to absorb some of the liquidity risk facing the markets - taking relatively illiquid assets on to its own books and offering cash in return.
Fed staffers said the central bank would seek to largely offset the increase in its balance sheet by cutting Treasury bill holdings.
However, Fed policymakers have become increasingly alarmed at turmoil in the market for mortgage-backed securities guaranteed by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the government-sponsored enterprises central to housing finance. Until recently, this segment of the US mortgage market had held up well, but rising spreads threatened to throttle this vital source of funds for the battered US housing market.
The Fed move triggered a slight decline in interbank borrowing spreads and the spread on 10-year Fannie and Freddie bonds. But the cost of buying insurance on US investment-grade companies hit a new record.
Mohammed El-Erian, co-chief executive of Pimco, the largest bond fund manager, said the Fed action "will do little to narrow the gap with the accelerating process of market deleveraging".
