Fed liquidity move mostly gets thumbs-up

By Ros Krasny

NEW YORK (Reuters) - One day after the Federal Reserve disappointed many investors at its final meeting of the year, the U.S. central bank helped salvage its reputation on Wednesday with an innovative plan to ease stress in global credit markets.

Analysts, including participants at the Reuters Investment Outlook 2008 Summit in New York, gave a guarded thumbs-up for the plan, which came the day after the Federal Open Market Committee took action that many thought was not sufficiently aggressive amid a climate of financial turmoil.

When Tuesday came and went without word of measures to address credit market stress, some Fed watchers questioned whether policy-makers understood the severity of the market's liquidity squeeze. But Wednesday brought redemption in the form of a plan, in concert with other central banks around the globe, to make it easier for stressed banks to borrow money.

"The Fed ... will provide liquidity that is desperately needed," said Jill King, a senior portfolio manager at Horizon Cash Management in Chicago. "It keeps us from a very scary situation."

Short-term interbank lending rates, including the London Interbank Offered Rate, have been elevated since credit market turmoil erupted in August. Problems had been expected to come to a head around the turn of the year.

"Is this a panacea, a cure? Probably not. But it's a sign that the Fed is thinking creatively," King said.

Analysts said the Fed -- by not announcing the liquidity plan at the end of its policy-setting meeting on Tuesday -- seemed to be differentiating between its two roles.

"Yesterday was for the economy. Today was for the market, and for liquidity," King said.  Continued...