The Fed cut the discount rate to 3.25 per cent from 3.5 per cent, effective immediately, and said it would increase the maximum maturity of discount rate loans to 90 days from 30 days.
In a surprise statement, the central bank also said it had established a new facility, which will be operating on Monday, through which it will lend to all 20 primary dealers. Under its discount window, it can only lend to depository institutions.
The actions were taken in concert with a decision to approve special financing to facilitate the purchase of ailing investment bank Bear Stearns by JPMorgan Chase & Co . Under the deal, the Fed agreed to fund up to US$30 billion of Bear Stearns' less liquid assets.
The measures were the latest in a series of extraordinary steps taken by the Fed aimed at keeping a credit crisis triggered by rising mortgage defaults from spiralling out of control.
Following are previous steps the Fed has taken since August, when the credit crisis erupted:
March 14: The Fed says it authorized JPMorgan Chase to borrow at the discount window on behalf of Bear Stearns, an emergency move believed to have been last used in the Great Depression.
March 11: The Fed says it will accept a broader range of collateral, including home mortgages, in a new securities lending program meant to foster greater liquidity in financial markets. It says it would lend up to US$200 billion to primary dealers, secured for 28 days, and accept federal agency home mortgage-backed securities and highly rated private mortgage-backed securities as collateral.
The action was coordinated with steps by the Bank of Canada, Bank of England, European Central Bank and Swiss National Bank. The Fed also increased existing currency swap lines with the ECB and SNB to up to US$30 billion and US$6 billion, respectively, and extended the term of those lines through September to help those central banks provide dollar liquidity in their markets.
March 7: The Fed says it will inject US$100 billion into the banking system by increasing the size of its two term auctions of short-term funding and start a series of term repurchase transactions with primary dealers expected to be worth another US$100 billion.
It also says it will continue to conduct term auction facility auctions, or TAF auctions, for at least the next six months, unless market conditions render them unnecessary, and increase auction sizes if conditions warrant.
Feb 29: Fed announces two TAF auctions of US$30 billion each in March. It says it intends to conduct auctions for as long as necessary to address elevated pressures in short-term funding markets.
Feb 1: Fed announces it will continue biweekly TAF auctions in February, holding the amount in each auction steady at US$30 billion. The central bank lowers the minimum bid size to US$5 million from US$10 million to include smaller institutions.
Jan 3: The Fed raises TAF auction amounts to US$30 billion from US$20 billion for each of the two auctions in January. The European Central Bank and the Swiss National Bank also offer dollar funds in conjunction with the Fed auctions.
Dec 12, 2007: As part of a global coordinated central bank effort, the Fed establishes the TAF to provide funds over a longer period to a wider range of banks to meet temporary shortages of funds.
The Fed also establishes foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The arrangements will provide up to US$20 billion for the ECB and US$4 billion for the SNB. The Fed says the swap lines will exist for up to six months.
Nov 26, 2007: The Fed promises more than the usual year-end liquidity and says it will lift limits on how much can be lent to any one bank. It says it will also provide sufficient reserves to stem upward pressure on the federal funds rate.
Aug 17, 2007: The Fed cuts the discount rate by 0.5 percentage point.
Aug. 10, 2007: In a rare statement, the Fed says banks were experiencing unusual funding needs because of dislocations in money and credit markets and that it would provide funds as needed. -- REUTERS