Fed seen mulling further market soothing steps

By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve is mulling further steps to address liquidity problems in financial markets in case measures taken to date fail to gain traction, a Fed official confirmed on Wednesday.

Steps under review include the Treasury Department borrowing in excess of its requirements and depositing the surplus at the Fed. This would allow the central to make funds available to banks and Wall Street firms without pushing down interest rates.

Other possible actions include issuing debt under the Fed's name and seeking authority to immediately pay interest on commercial bank reserves, the official said.

The options under consideration by the Fed were first reported by the Wall Street Journal on Wednesday.

Such moves are not imminent because the Fed's balance sheet can currently accommodate further lending aimed at restoring normal flows of credit in a market paralyzed by the subprime mortgage debacle. In recent months, the central bank has announced several new facilities to extend credit to banks and Wall Street firms.

"Evidently it's another attempt at seeking out non-policy based solutions to the credit crunch, which sits well with the (Fed) minutes yesterday which noted that monetary policy alone was insufficient to stem the credit crisis," said Richard McGuire, fixed income strategist at RBC Capital Markets in London.

EFFECT ON RATES

The Fed uses its assets to set interest rate targets and control the money supply. The central bank can expand its balance sheet practically without limit, but that would boost reserves and push down the federal funds rate, which banks charge each other for loans.