March 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may be running out of room to pump money into the financial markets and cut interest rates to rescue the economy.
The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. The central bank has cut short- term rates by 2.25 percentage points since September and will probably reduce them again tomorrow.
``They're using up their ammunition on the liquidity and overnight interest-rate fronts,'' said Lou Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other financial institutions.
Traders today cemented bets that the Fed will cut its benchmark rate by an unprecedented 1 percentage point when policy makers hold their regular meeting tomorrow. Yesterday, in emergency decisions, the Fed lowered the separate rate on direct loans to commercial banks by a quarter-point, to 3.25 percent, and opened up lending at that rate to securities firms.
The action comes on top of Chairman Ben S. Bernanke's other balance-sheet commitments totaling as much as $430 billion through other auctions, repurchase agreements and $30 billion in financing to help JPMorgan Chase & Co. purchase Bear Stearns Cos.
`Capacity Issue'
``There's a limit to how much the Fed can do,'' said Brian Sack, a former Fed research manager, and now senior economist at Macroeconomic Advisers LLC in Washington. ``They've been incredibly aggressive with their balance-sheet policies over the past several weeks, and that has very quickly put this capacity issue in play.''
The actions mean the Fed, and consequently U.S. taxpayers, are assuming additional credit risks. It may also put the central bank closer to the unwanted position of affecting private asset prices, ``a line that they've been reluctant to cross in the past,'' Sack said.
The federal funds rate has remained at 3 percent since the Fed's last action, a half-point reduction, on Jan. 30.
In the most dire of circumstance, the Fed could go so far as to cut its benchmark rate to zero, promise to hold it there and flood the financial system with more than enough money to ensure that happened, under a strategy known as ``quantitative easing.''
Pressure on Treasury
The Fed's actions ``absolutely'' put more pressure on the White House and Treasury Department to take further action that would restore ``credibility'' in the mortgage process, said Scott Pardee, former head of foreign-exchange operations at the New York Fed.
The Fed's other programs include as much as $200 billion in lending of Treasuries to primary dealers in exchange for debt that includes mortgage-backed securities, announced March 11 and provisionally set to begin March 27. Earlier this month, the Fed increased the size of separate funding auctions, to $100 billion in March from a previously announced $60 billion.
The central bank also said March 7 that it would make $100 billion available through repurchase agreements, where the Fed loans cash in return for assets including mortgage debt.
JPMorgan Chief Executive Officer Jamie Dimon yesterday agreed to buy Bear Stearns, the second-biggest underwriter of U.S. mortgage securities, for $240 million, less than a 10th of its value last week. In order to strike a deal before the opening of Tokyo trading, the Fed agreed to help JPMorgan finance up to $30 billion of Bear Stearns's ``less liquid assets.''
Bernanke Measures
The moves yesterday were Bernanke's latest steps 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. U.S., Asian and European equities slumped.
The Fed has lowered its benchmark overnight rate five times and the discount rate seven times since the middle of August, when the collapse of U.S. subprime mortgages started to infect markets around the world.
Opening up lending to firms other than commercial banks represents a shift in the Fed's 94-year history. The so-called primary dealers include firms that are units of commercial banks and several that aren't, including Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co.
Bernanke is likely to find new ways to do whatever it takes to keep markets running and revive economic growth, Pardee said.
Regarding the Fed's moves so far, ``that shows you how bad the market situation is, and it also raises the question of whether the Fed needs help from Congress or the administration,'' Sack said.
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