Bernanke’s war against recession

Guy Monson and Subitha Subramaniam on how the US Federal Reserve is facing up to recession

US policymakers are at war against recession. Since January, the Federal Reserve under Ben Bernanke has cut interest rates by 1.25 per cent; markets expect another cut of as much as 1 per cent this week. Such dramatic reductions are a far cry from the studied gradualism of the Greenspan years. In addition, Treasury secretary Hank Paulson has deployed fiscal policy to offset the housing squeeze with an aggressive package of $152 billion in tax rebates.

At its core, this ‘war’ aims to shore up US house prices, the essential collateral for the US financial system. The Fed is moving into unchartered territory with policies such as its Term Securities Lending Facility which allows banks and securities dealers to swap risky mortgage securities for Treasury bills. This week’s fire sale of Bear Stearns to JP Morgan is underwritten by a $30 billion Fed guarantee.