Fed cuts discount rate, expands loans to avert crisis

The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.

Analysts warn Fed is taking a risk by opening up its own balance sheet to the same poisonous securities that have strained banks to the limit, but the risk of doing nothing is far greater.

"Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom," Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion, told Bloomberg news. "The problem is there's so much concern about credit quality that now there are solvency issues, and it's something the Fed has a more difficult time dealing with."

The move is Chairman Ben S. Bernanke's latest step to alleviate a seven-month credit squeeze that's probably pushed the U.S. into a recession. The dollar tumbled to a 12-year low against the yen and Treasury notes rallied as traders increased bets that officials will reduce their main rate by 1 percentage point when they meet tomorrow.

The Fed's balance sheet lists assets of $869 billion, of which $709 billion are Treasury securities held outright. First, the central bank lends only to primary dealers, the big names in the financial world. That means the risk of an outright failure is minimal -- although Bear Stearns' swift demise serves as a reminder that it is not unheard of.

Second, the Fed assigns a "haircut" or markdown to securities pledged as collateral, which means they would have to shed significant value before the Fed felt the loss.

Analysts said risks to the U.S. financial system approaching those seen during the Great Depression forced the Fed's hand. "The U.S. financial system probably is under more strain now than for at least several decades. Let's hope (the Fed's) determined efforts eventually get 'traction,'" Rory Robertson, analyst at Macquarie Bank in Sydney, told Reuters.

The last time the Fed lowered rates in an emergency move, on January, it was at the beginning of the New York business day and came in the form of an unexpected three-quarter point cut in the benchmark federal funds rate.

GLOBAL MARKETS

U.S. stock index futures, Asian and European equities and the dollar tumbled after the Federal Reserve cut its discount interest rate at an emergency meeting and JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $2 a share. Bonds, gold and crude oil climbed.

Indexes in Asia and Europe fell, as UBS AG in Zurich and Mitsubishi UFJ Financial Group Inc. in Tokyo both dropped to the lowest in at least four years. Europe's benchmark fell 2.8 percent and Hong Kong's slumped 5.2 percent on mounting concern that other financial companies will run short of cash.

The dollar sank to a record low against the euro and the Swiss franc and fell to the weakest in 12 years against the yen, helping push gold and crude oil to highs.

"This is a serious crisis," said David Goldman, senior portfolio strategist at Asteri Capital in New York and former head of debt research at Banc of America Securities LLC. "Something is systemically very wrong and we're at a very dangerous moment.", Bloomberg reported.