Federal Reserve Frees Up More Cash in Bank System

The Federal Reserve, worried that a slowdown in lending could push the economy into a recession, today loosened its rules on the reserves banks must hold, freeing up more cash in the banking system.

But economists said the move, one of several methods the Fed can use to stimulate the economy, will not have much impact on a widely seen credit crunch.

The central bank said it was cutting the 3% reserve requirement on non-personal time deposits with maturities of less than 18 months, which are mostly certificates of deposit held by corporations. It also said a reserve rule on Eurocurrency liabilities will be eliminated.

“Both requirements will be lowered to zero over coming weeks,” the Fed said in a statement.

The move will free up tens of billions of dollars for banks in what the Fed hopes will offset their tighter lending policies.

Potential borrowers have had a tougher time getting bank loans recently as lenders, troubled by problem real estate and other loans, have kept a tighter hold on their purse strings.

The changes are the first in reserve requirements since 1983 and came in response to calls from businesses and the Bush Administration for easier credit to spur the economy, which Fed Chairman Alan Greenspan last week said took a “meaningful downturn” in October and November.

The dollar fell and U.S. Treasury bond prices gained in reaction to the Fed’s loosening of monetary policy.

“That’s an easing by the Fed,” said Earl Johnson, vice president of Harris Trust & Savings Bank in Chicago, adding that the moves “indicate the Fed is concerned about the economy slipping into recession.”