Fed officials are increasingly convinced that the United States is sliding into a recession, and they worry that the deepening credit squeeze will aggravate the problem by making it even harder for consumers and businesses to borrow money for houses, new equipment or new factories.
The Fed’s hope is to relieve some of the pressure on institutions to sell at fire-sale prices, easing the strains on economic activity and making the credit markets feel more comfortable in buying mortgage bonds again.
Despite the staggering sums being offered by the Fed over the past week, some analysts warned that the new infusion of money might not be enough to fill the hole caused by the losses on ill-conceived mortgages during the housing bubble.
“They are essentially creating a $300 billion bank out of nothing,” said Lou Crandall, chief economist at Wrightson ICAP, a financial research firm.
But while the Fed’s moves may relieve short-term cash problems, Mr. Crandall said, “it doesn’t solve the fundamental issue, which is the decline of capital in the banking system.”