Hypothetical Bias

More unusual monetary policy

The Fed's Press Release:

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize 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. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Here is what the WSJ's Morning Report is saying:

Crazy world.

The Fed's fourth monetary policy tool

The Fed uses the Term Auction Facility:

In another global show of financial force, the Federal Reserve and four other central banks announced significantly expanded loans of cash and securities to banks and securities dealers in an effort to alleviate growing strains in the credit markets.

From the WSJ Economics Blog: Fed's Smartest Move.

ECO 2040: Recession odds

From the WSJ Weekly Update (Economists Raise the Odds of a Recession to 49%):

SUMMARY: Economists gave Fed chief Bernanke the lowest grade of his two-year tenure, in the latest Wall Street Journal forecasting survey, and said a recession is becoming more likely.

QUESTIONS:

1. Why have economists recently raised the odds of a recession?
2. What are the chances that a recession, if it occurs, will be more severe than the last recession?
3. Do economists expect further Fed rate cuts?
4. What explains the drop in economists' rating of Fed chair Bernanke?

ECO 2040: Expected inflation links

• Economics.About.com: Inflation is related to the money supply? Who knew?
• Makiw: Inflation expectations are rising

ECO 2040: Weak GDP

Behind Weak GDP ...

Fourth-quarter growth was weaker than expected, but not as weak as the headline suggested. Real gross domestic product grew at a 0.6% annual rate, well below the 1.2% consensus. But most of the surprise was in inventories, which actually declined.