In emergency move, Fed cuts key rate, offers quick aid to brokers

US Federal Reserve
©AFP/GETTY IMAGES/File - Chip Somodevilla

WASHINGTON - In a rare Sunday action aimed at heading off a new market upheaval, the Federal Reserve cut a key rate for direct loans to certain financial institutions and said it would offer immediate liquidity to the brokerage system.

The US central bank said it was cutting by a quarter-point to 3.25 percent its primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition."

The cut, announced as Asian financial markets were set to open, came after a week of market turmoil and was part of "two initiatives designed to bolster market liquidity and promote orderly market functioning," a Fed statement said.

The Fed said it would make liquidity available starting Monday to "primary dealers," which include brokerages that are not currently eligible for direct loans from the central bank.

A statement said the central bank had authorized the Federal Reserve Bank of New York "to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets" starting Monday and in place for at least six months.

Financial firms would be able to borrow at the primary credit or discount rate, which was just reduced by the Fed.

The New York Fed said it would accept a wide range of collateral, including mortgage-backed securities in some cases, to help institutions stuck with securities that cannot be traded in a gridlocked financial system.

It was the frozen credit markets that put the squeeze last week on Wall Street financial giant Bear Stearns, which faced a cash crunch and had to get a Fed loan through JPMorgan Chase, and on Sunday signed a deal to sell the storied brokerage to JPMorgan for a fraction of its price a week ago.

The Fed also said it approved the arrangement announced by JPMorgan Chase & Co. and Bear Stearns, in which the banking giant would acquire Bear Stearns for a mere two dollars a share.