Financial Times FT.com

Practicalities the only limit on Fed action

By Krishna Guha in Washington

Published: October 21 2008 20:53 | Last updated: October 21 2008 20:53

The Federal Reserve’s latest huge liquidity operation – $540bn to purchase debt held by money market funds – raises the question as to whether there is any limit to the scale of lending operations the US central bank can undertake to battle the credit crisis. The short answer is that the Fed does not face binding economic constraints, but it does face operational constraints.

The Fed could, in theory, become the main lender to the entire US financial sector or even the wider economy without running out of money or fuelling inflation.

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