MercoPress. South Atlantic News Agency

US Fed to be grilled over massive support to financial system

United States Federal Reserve will make a further 100 billion US dollars available to major banks in April, trying to ease concerns about a global credit crunch. The sum, offered across two auctions, is in addition to 260 billion US dollars provided in short-term loans to the end of March.

Other unorthodox steps include the Fed allowing investment banks to borrow from it directly, previously only possible for commercial banks.

The financial crisis has caused chaos on US and global markets. This month Bear Stearns became the highest profile US victim of the credit crunch - facing near collapse before a deal was struck for it to be bought at a bargain price by JP Morgan Chase. The rescue was supported by the Fed, which agreed to buy up to 29 billion of Bear Stearns debts. The Fed's chairman, Ben Bernanke, will be quizzed about the auctions, and other Fed actions to ease the credit crunch, when he faces Congress next week. Critics say that the central bank is bailing out banks who have not assessed their risks properly Since December the Fed has held auctions every two weeks, offering short-term loans to commercial banks. The amounts offered began at 20 billion, rose to 30 billion and were hiked to 50 billion n in early March as the severity of the credit shortage grew. They are set to continue until at least September. The hope is that the extra cash will ease the fears that banks have of lending money to each other, which have pushed short-term interest rates to record highs, despite the Fed's series of interest rate cuts. This week there were concerted moves by central banks to bring down the Libor - the rate at which banks lend to one another - which is currently close to the high levels at the beginning of the credit crunch. Dennis Lockhart, president of the Atlanta Fed said the US economy could be slipping into recession and the Federal Reserve must cushion the pain. "It's clear the economy is in a slowdown that resembles past periods that were the leading edge of a recession" Lockhart told a Rotary Club meeting which could be indicating support for further interest rate cuts. "I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow." The Fed last week slashed benchmark lending rates by a hefty three-quarter of a percentage point to a three-year low of 2.25%. Investors think it will trim rates by another 50 basis points at its next scheduled policy meeting on April 29-30. The US Commerce Department reported this week that GDP increased at a feeble 0.6% annual rate in the October to December quarter. In the prior quarter, the economy clocked in at a sizzling 4.9% growth rate. An inflation measure linked to the GDP report showed that US overall prices increased at a rate of 3.9% in the fourth quarter. That was not as high as previously estimated, but the rise marked a big pickup from the third quarter's 1.8%. Meanwhile, Cleveland Federal Reserve Bank president Sandra Pianalto said a mortgage crisis that is pulling down housing prices is casting a pall over consumer spending and is "very detrimental to our economy." Much of her address in Dayton, Ohio, dealt with the Fed's effort to mitigate the damage from the credit crisis. Gary Stern, president of the Minneapolis Fed, also voiced concern over slow growth. "People should be under no illusions that even if policy is reasonably effective and reasonably timely, given the disruptions we've had with the financial sector and implications for the outlook ... some of this (weakness) is now baked in the cake" Stern told a seminar in London.