Fed is becoming more creative

the Fed signaled in its end-of-meeting statement that the prospect of more rate cuts remains on the table. "The outlook...has weakened further," it said. "Consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth." It said "downside risks to growth remain," and the Fed will "act in a timely manner as needed." Nonetheless, the Fed has increasingly come to the view that lower rates alone won't restore order to the financial markets and prevent a severe recession. It has rolled out ever more creative and aggressive attempts to infuse cash into market corners where it normally doesn't operate, culminating in Sunday's decision to lend to investment banks from its "discount window," a privilege previously reserved for commercial banks. Chairman Ben Bernanke also has publicly backed action to use public money to stem a tide of mortgage defaults and foreclosures. The Fed's actions are among several aggressive steps throughout the federal government that are coming to a head this week and could prove critical in combating the crisis. Today the regulator of Fannie Mae and Freddie Mac, which provide the bulk of funding for home mortgages, is to announce an easing of their capital requirements and the companies are to pledge to raise more capital, people familiar with the matter said. Those steps should enable them to back more mortgages. While the Fed still expects inflation to ease as commodity prices plateau and as higher unemployment blunts wage and price gains, it said that "uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully." The futures markets reduced the expectation they are showing for additional cuts. The futures now see the federal-funds rate, charged on overnight loans between banks, easing to between 1.5% and 1.75% by year's end. Before yesterday's move, futures investors were betting the rate would fall to 1.25% to 1.5%. The Fed also lowered the rate charged on direct "discount window" loans it makes available to banks and -- since Sunday -- to investment banks. It slashed the rate to 2.5% from 3.25%, keeping it a quarter-point above the federal-funds rate. Commercial banks began lowering their prime interest rates, to which some variable-rate loans are tied, to 5.25% from 6%. The stresses in the credit markets have kept some of the Fed's rate-cutting efforts from filtering through to borrowers, as reflectecd in 30 mortgage rate and jukp mortgage rate.