The Fed announced two initiatives designed to bolster market liquidity and promote orderly market functioning, and approved the JP Morgan - Bear Stearns deal. First, they authorized 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.
It is available today, and 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.
Second, the Federal Reserve Board decreased the primary credit rate ("Discount Rate") from 3.5% to 3.25%. Lastly, the Board also approved the financing arrangement announced by JPMorgan Chase and Bear Stearns where Bear is being purchased for 1% of its value only 16 days ago! Tomorrow, the FOMC will meet, and obviously the odds that the Fed will cut the Fed Funds rate by 1.0% have increased. Mortgage prices are really a mixed bag ("where should they be priced?") with the 10-yr down to 3.41% currently.
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