On Sunday of March 16, the FOMC held an extraordinary meeting, which adopted measures to raise liquidity on capital markets. The move is necessary to sustain economic growth rates. To start, a decision was made to reduce the discount rate, with which the Fed charges on direct credits to banks, by 25 basis points, to 3.25. To add to this, the maximum term of a loan was tripled from 30 to 90 days. Finally, both banks and other organizations that operate in the mortgage loan market, may now take Fed credits.
We believe that the measures taken by the Fed are indicative of the extremely negative influence exerted by liquidity shortfalls in the financial sector on the US economy. Another example of this is the purchase by J.P. Morgan of Bear Sterns, the US fifth largest bank, for a tenth of its recent market value. In our view, the Fed has to adopt more measures to raise liquidity in the market.
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