New Fed plan calms markets, but no silver bullet

By Alister Bull - Analysis

WASHINGTON (Reuters) - A bold $200 billion lending plan unveiled by the Federal Reserve on Tuesday won applause for creative thinking and calmed stressed markets, but failed to convince skeptics that it was a silver bullet.

"It is a constructive step, but it is not a full solution," said economist Brian Sack at Macroeconomic Advisers.

"It does not reduce the amount of mortgage-related risk that the private sector has to bear. It does not solve the capital pressure on banks," said Sack, a former senior Fed economist.

The Fed has already cut interest rates by 2.25 percentage points since mid-September to shield the economy from a collapse in the U.S. subprime market that has chilled growth and sparked a global credit crunch.

In addition, it had previously taken a number of other steps to help provide liquidity to markets.

Its latest move, however, goes beyond those steps by allowing triple-A rated privately issued mortgage backed securities to be swapped for U.S. Treasuries. In combination with actions announced on Friday, the Fed has vowed to make an additional $400 billion available to markets.

"The Fed by accepting MBS as collateral is now attempting to inject liquidity directly to the area that is the source of the credit crunch," said Doug Roberts, chief investment strategist for Channel Capital Research.

The Fed's announcement was coordinated with the European Central Bank, Bank of England and other major central banks. The united front in itself could help restore confidence.