Fed gives shot in arm, but recession looms

By Joanne Morrison - Analysis

WASHINGTON (Reuters) - The Federal Reserve has offered credit markets a quick shot in the arm with a new $200 billion lending facility, and while this will ease some the liquidity problems, it isn't likely to be enough to keep the U.S. economy out of recession.

Wall Street economists were quick to call the new lending facility a step in the right direction, but what's most needed is time for the de-leveraging of billions of dollars in loans globally.

"This is another tool and, with additional upcoming reductions in the Fed funds rate, this should help what is a painful process," said Chris Wiegand, financial economist at Citigroup. "But it's not the be-all and end-all solution."

The Fed, which has cut benchmark interest rates by 2.25 percentage points since mid-September last year, is widely expected to reduce them further when it meets on March 18.

But more is needed as mortgage backed bond prices have plunged, imperiling the value of bank assets, impeding bank lending, while corporate credit costs have soared.

The U.S. dollar has also fallen sharply in the past six weeks, oil prices have risen to new record highs, and benchmark U.S. stock prices have fallen back to near the 18-month lows seen in January.

The Fed's action on Tuesday to allow banks to off-load even private label mortgage backed securities onto the Fed's balance sheet was another attempt to ease the growing credit crisis that policy-makers less than a year ago vowed would be contained to the housing sector.

Some analysts question if the Fed has responded too late.

"They are moving in the right direction. I just think they are being seen as reactive," said John Canally, an investment strategist at LPL Financial.

The Fed's latest actions follow a plan announced last Friday to increase the amount of liquidity offered in the special term auction facilities introduced last year, and the 2.25 percentage point reduction in the target Fed funds overnight lending rate since last September.

"We've got a global margin call in effect" said Marc Chandler, market strategist at Brown Brothers Harriman in New York.

Chandler and others say the Fed's efforts are still going to be looked upon as rather modest given the magnitude of the de-leveraging of financial institutions' balance sheets that is going on. Some Wall Street estimates say these amounts could exceed $1 trillion, eclipsing the $200 billion program unveiled.

"I'd say the problem has metastasized and basically has punished the innocent and guilty alike," Chandler said.

WORST TO COME

The worst in the credit crisis is likely still yet to come and that will complicate efforts to re-start U.S. economic growth after what some economists see as the worst housing slump since the Great Depression.