Fed takes exceptional steps in exceptional times

WASHINGTON — Frantically trying to stop the bleeding on Wall Street, the Federal Reserve took a first-time step Tuesday to get cash directly to businesses and hinted that interest rates could come down soon. Stocks continued their free fall anyway and hit new five-year lows.

The central bank invoked emergency powers to lend money to companies outside the financial sector and buy up mounds of commercial paper, the short-term debt that firms use to pay for everyday expenses like salaries and supplies.

The Fed, which has only loaned money to banks before, made the move as the gravest financial crisis in decades wore on and concern spread around the world.

In a speech to the National Association for Business Economics, Fed Chairman Ben Bernanke delivered a strong signal that interest rates may need to be cut. And he warned the country could be stuck in the economic doldrums for some time.

"The outlook for economic growth has worsened," Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance."

The gloomy assessment appeared to open the door wider to an interest-rate cut on or before the Fed convenes again Oct. 28. The Fed's key interest rate now stands at 2 percent.

Wall Street turned its back. The Dow Jones industrials lost 508 points, more than 5 percent, to close at 9,447, the lowest since Sept. 30, 2003. The Standard & Poor's 500, a broader stock index, closed below 1,000 for the first time since that same day.

Concerns are mounting that a global recession is developing, and pressure is growing on the U.S. government to do something beyond the $700 billion financial-bailout package that Bush signed into law Friday.

To that end, the Fed announced it would begin buying companies' short-term debt. The powers were bestowed during the Depression as part of the Federal Reserve Act.

The government's bailout package is aimed at thawing lending by buying bad mortgage-related debt off the books of troubled financial institutions. The idea is that the banks would then be in a better position to lend and get the economy moving.

Commercial-paper borrowing usually ranges from overnight to less than a week. But in the current climate of mistrust, the market has dried up considerably.

The action makes the Fed a crucial source of credit for nonfinancial businesses in addition to commercial banks and investment firms — and also exposes it to risk because so much of the debt would not be backed by collateral.

Credit markets, clenched up for weeks now, relaxed somewhat after the Fed's move.

The Fed said it was creating a new entity to buy two types of short-term debt, known as three-month unsecured and asset-backed commercial paper, directly from eligible companies. It hopes to have the program up and running soon, Fed officials said.

Fed officials said they would buy as much of the debt as necessary to get the market functioning again but refused to say how much that might be. They noted that around $1.3 trillion worth of commercial paper would qualify.

The Treasury Department, which worked with the Fed on the program, said the action was "necessary to prevent substantial disruptions to the financial markets and the economy."

The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said. The money would be separate from the $700 billion financial-bailout package.

The Fed said it planned to stop buying the short-term debt on April 30 but may extend the program.

There was $1.6 trillion in outstanding commercial paper, seasonally adjusted, on the market as of last week, the most recent data from the Fed. The market has shrunk from $2.2 trillion last summer.

Associated Press writers Madlen Read and Tim Paradis in New York and Ben Feller in Washington contributed to this report.