Federal Reserve Pledge To Ease Credit Crunch

By Stewart Douglas

The Federal Reserve has today announced it will use all tools available to it to prevent a credit crunch, according to international media reports.

The Federal Reserve, the authority responsible for deciding US monetary policy, has been quoted by Senator Christopher Dodd as pledging to exercise their full availability of powers in dampening the threat of a credit crunch.

With banks across the world facing liquidity problems after growing defaults from within the US sub-prime market, lending is becoming far more restricted for both consumer and commercial borrowers.

As a result, analysts have feared the potential for a worldwide credit crunch, where lenders are unable to grant finance because of a lack of readily available cash assets and lending stock, which it is feared could plunge the global economy into recession. 

Despite large-scale cash investment from the Federal Reserve to boost liquidity, as well as its emergency decision to cut the primary discount interest rate, markets have still remained nervous about the health of the credit economy.

However, in his role as Senate Banking Committee Chairman, Senator Dodd made his announcement today shortly after a meeting with the Federal Reserve Chairman Ben Bernanke.

The news is taken to signify imminent future rate cuts to allow banks to borrow more money at affordable rates, whilst further cash saving plans may be on the cards.

Meanwhile markets have responded with mixed sentiments, with the Dow Jones eventually closing down on the course of the day, despite what would be considered positive steps towards remedying the crisis that has emerged.

However, many analysts have noted that whatever involvement the Federal Reserve takes in the mortgage market, the sub-prime crisis is likely to continue for the foreseeable future, with losses far from even remotely quantifiable at this stage.