Fed Cuts Key Rate by Half Point to 1%

The decision to once again lower the rate target is only the latest in a long string of moves to shore up the financial sector. The central bank on Monday launched a facility to purchase commercial paper, and is now paying interest on bank reserves and accepting a wider range of collateral for loans to banks.

In addition, the Treasury Department has begun its initiative to invest $250 billion in preferred equity stakes in the financial sector, aimed at freeing up lending. The funding comes from the $700 billion Troubled Asset Relief Program, or TARP, approved by Congress earlier this month.

Among banks that have agreed to accept Treasury investments are JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo, Goldman Sachs (GS), Morgan Stanley (MS), Bank of New York Mellon (BK), State Street (STT), and at least 25 smaller, regional banks. So far, the Treasury has agreed to provide at least 65% of its authorization, or $163.2 billion.

Roberts says that while the cut will affect rates on Treasury notes and certain loans, it was "more symbolic than anything else."

"Really what's going to be more important is thawing out the credit markets," says Roberts, "with the commercial paper funding facility and the TARP legislation. Those go directly to the sources that require credit."

For its part, the Fed predicted that the combination of measures to lower borrowing costs, promote prudent lending an restore liquidity will work in tandem to foster a stronger financial system.

"Recent policy actions ... should help over time to improve credit conditions and promote a return to moderate economic growth," the FOMC said. "Nevertheless, downside risks to growth remain."

>To order reprints of this article, click here: Reprints