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Fed cuts bank rate to boost confidence The move aims to improve market liquidity.

The Federal Reserve on Sunday cut the discount rate for banks by 25 basis points to 3.25 per cent and created a new lending facility for other financial institutions in an attempt to boost market liquidity.

In announcing the surprise move, Ben Bernanke, chairman of the US central bank, said the Fed and Treasury were “working to promote liquid, well-functioning financial markets, which are essential for economic growth”.

“First, we have introduced a special lending facility that will provide liquidity to primary dealers at terms similar to those available to banks at the discount window,” said Bernanke.

“Second, we reduced the discount rate by ¼ per cent and increased the maximum maturity of discount window loans to 90 days. These steps will provide financial institutions with greater assurance of access to funds.”

Separately, the Fed agreed to fund up to $30 billion (£15billion) to help JPMorgan complete its planned purchase of Bear Stearns, a deal that was finalised on Sunday.Timothy Geithner, president of the New York Fed, said the moves were “designed to help get liquidity to where it can help play an appropriate role?.?.?.?to address a range of challenges”.

The Fed said the new lending facility would be available for at least six months, and possibly longer depending on market conditions. The credit provided under the new facility would be collateralised by investment grade debt securities, and would be charged the same rate as the discount rate.

Senior Fed officials described the surprise action as a broad arrangement to reduce risk across the system. They dismissed suggestions that it was aimed at preventing a situation where they might have to rescue other investment banks, as they did with Bear Stearns last week.

One official said the move was an offensive, not defensive, action aimed at helping the market system. Before the Fed announced its actions on Sunday night, Hank Paulson, US Treasury secretary, had defended last week’s move to rescue Bear Stearns.

He added that the government would take whatever actions were necessary to ensure the stability of the US financial system.

Mr Paulson said he was convinced the Fed’s move to provide emergency funding to the stricken investment bank was the “right decision” even though he recognised the risk of moral hazard.

“You need to balance these two considerations,” Mr Paulson told Fox News. “At this time, given where we are, and given how important it is to minimise disruptions in our capital markets, and how important it is to protect the economy?.?.?.?this was the right decision.”

The Treasury secretary declined to say whether the government would be prepared to rescue any other investment banks that ran into similar difficulties, but stressed that the “number one priority” was the stability of the US financial system.