An announcement from the Federal Reserve on Wednesday (Dec. 12) lent clarity to the decision by its Federal Open Market Committee to cut its two key interest rates by only 25 basis points on Tuesday despite signs that the economy was in danger of slipping into recession--it had another trick up its sleeve.

The Fed early Wednesday morning announced an entirely new program to inject dollars into nearly seized up credit markets that, in collaboration with the European Central Bank, Bank of England, Bank of Canada and the Swiss National Bank, will lend money to banks on a short term basis at the average of the federal funds rate for the term of the loan. It is calling the new program, which is temporary, a "Term Auction Facility," and it said the program is "designed to address elevated pressures in short-term funding markets."

The news was intially greeted positively on Wall Street, which greeted the annoucment with a broad-based rally in the equity and credit markets that sent builder stocks up sharply. But the rally faded as the day wore on, moving the Dow into negative territory and dragging most of the builder stocks down with the broader market indexes. The Standard & Poors Home Builders Exchange Traded Fund (XHB) was up 2.08% at 10 a.m. but down the same percentage by late afternoon. At close, the Dow ended up 41.13 and the XHB close down marginally, with individual builder stocks mixed. Centex closed up more than 4%, Pulte up 3.5%, D.R. Horton up 4.2% and Ryland up 3%.

Currently, the types of collateral acceptable for borrowing at the federal funds rate are more limited than those for loans at the Fed's discount rate, which is now half a percent higher than the federal funds rate. The new Term Auction Facility will combine the wider range of acceptable collateral that banks must put up to borrow with the lower federal funds rate.

In a statement, the Fed said, "By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress."

In an effort to help stabilize the international credit markets that deal in dollar-denominated transactions, the Fed said it authorized temporary (6-month) reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will provide dollars in amounts of up to $20 billion and $4 billion to the ECB and the SNB, respectively, for use in their jurisdictions.

There are four auctions scheduled between December 17 and the end of January. In its statement, the Fed said, "Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve¹s current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit."

The new program could have a direct affect on certain types of mortgages tied to the London Interbank Offered Rate, which has moved up as the Fed has cut rates in the U.S. since August, largely due to the decline in the relative value of the dollar. By injecting dollars into the international system, the Fed hopes to put downward pressure on LIBOR and other offshore markets.