Fed looks for more measures to increase credit

The Fed may lower the discount rate - what it charges banks for short-term direct loans - by a quarter-point more than the benchmark rate after vice-chairman Donald Kohn and San Francisco Fed president Janet Yellen publicly expressed frustration that previous rate cuts have not encouraged banks to lend to one another.

Such a move would narrow the gap between the two rates - normally one percentage point - to a quarter-point. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim that they are taking advantage of a better deal.

'The Fed has to re-liquefy the markets to reduce the risk of a financial accident,' said Lou Crandall, who used to work at the New York Fed and is now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that focuses on government debt.

Policymakers are struggling to contain a crisis of confidence among banks that sent the cost of three-month loans between lenders to the highest in seven years. Failure to head off a credit crunch may send the economy into its first recession since 2001, economists said. Mr Crandall predicted that the Fed will lower the discount rate by half a point, to 4.5 per cent, and the main federal funds rate target by a quarter point to 4.25 per cent when it meets on Dec 11.

Futures prices indicate a 50-50 chance of a half point move in the federal funds rate next week. -- Bloomberg