After an inter-meeting conference call on Sunday evening, March 16, the Federal Open Market Committee announced new initiatives to boost market liquidity and promote orderly market functioning.

First, the FOMC voted unanimously to authorize the Federal Reserve Bank of New York to create a new lending facility to improve the ability of primary U.S. Treasury securities dealers to provide financing to participants in securitization markets. In effect, the Fed is opening the discount window borrowing facility—normally only available to Federal Reserve system commercial banks—to primary U.S. Treasury dealers. The facility will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the discount rate at the Federal Reserve Bank of New York.

Second, the FOMC unanimously approved a request by the Federal Reserve Bank of New York to decrease the discount rate from 3.50% to 3.25%, effective immediately. This lowers the spread of the discount rate over the target federal funds rate to 0.25 percentage point. The Federal Reserve Board also approved an increase in the maximum maturity of discount window loans to 90 days, from 30 days.

Finally, the Fed also approved the takeover of Bear Stearns by JPMorgan Chase for $2.00 a share.

These extraordinary measures by the Federal Reserve's FOMC have been taken in response to the further escalation of pressures in the U.S. financial markets, as borrowing spreads continued to widen sharply on Friday and over the weekend in response to the bailout of the Bear Stearns brokerage company. Markets have moved into a severe risk-aversion mode, with fears rapidly expanding beyond liquidity to the solvency of major financial intermediaries as the credit market crisis has worsened over the past two months. The upshot of further moves towards severe risk aversion was another drop in the 10-year bond yield to near 3.33%, while investors also moved into gold aggressively.

These moves by the Fed are a prelude to additional bold action to reduce interest rates expected at the March 18 meeting of the FOMC. Global Insight expects the FOMC to vote to slash the federal funds rate by 100 basis points, to 2.00%, and reduce the discount rate by a further 75 basis points, to 2.50%.