Lehman Bros.'bankruptcy

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In a statement, the Federal Open Market Committee (FOMC)acknowledges these pressures and then urged the market to wait forits earlier rate cuts to take affect. "Strains in financial marketshave increased significantly and labor markets have weakenedfurther," the FOMC says. "Economic growth appears to have slowedrecently, partly reflecting a softening of household spending.Tight credit conditions, the ongoing housing contraction, and someslowing in export growth are likely to weigh on economic growthover the next few quarters." But over time, says the FOMC, "thesubstantial easing of monetary policy, combined with ongoingmeasures to foster market liquidity, should help to promotemoderate economic growth."

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Inflation's uncertain outlook was one reason for the committee'sdecision, even though it does expect inflation to moderate laterthis year and next, as Federal Reserve chairman Ben Bernanke saidin a speech in August.

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The Federal Reserve also opted to keep interest rates at 2% atthe endof June; it was a decision that the commercial real estateindustry responded to with shrugs, as its main problem was and isthe tight debt environment, and not the cost of money.

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The FOMC's unanimous non-action on Tuesday, though, was met withmore concern, given the events of the last 72 hours. Trimming theinterest rate further is the only realistic tool available to thegovernment right now, Brian Bethune, chief US financial economistat Global Insight, told listeners on a conference call Tuesdaymorning before the Fed announced its decision.

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"We are entering the most dangerous phase of this crisis," hesaid, noting that the economy has weakened even further since July."In this situation the Fed is like the Marine Corp.--they can comein and deal with the crisis immediately by providing liquidity andreducing rates."

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The Fed has injected into the system a significant amount ofliquidity over the last couple of days, he acknowledged. "But inthe end we think the Fed needs to move to reduce rates" by another50 basis points.

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Inflation was an "overblown" issue "very much connected to thespike in energy prices," he also said. Now "there is no need to beconcerned about pipeline inflation risk." Furthermore, GlobalInsight's chief US economist Nigel Gault said on the same call, oilprices are now declining--a clear plus--but this decline will onlypartially offset the current economic troubles.

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Not surprisingly, there were varying reactions to the Fed'sdecision, largely coalescing around two schools of thought: one,epitomized by Bethune; the second, calling for the monetaryauthority to be conservative with one of the few inflation-fightingtools it has at its disposal.

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Also, the new measures the Fed announced it would take to injectmore liquidity into the system--as well as similar moves by otherworld central banks--is a more powerful action than an interestrate cut, Seth Weinstein, principal of Stamford, CT-based HannahReal Estate Investors, tells GlobeSt.com. "The system is beingflooded with cash as Central Banks, including the Fed, make tens ofbillions of dollars available to banks to lend," he says.

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On Monday the Federal Reserve Bank announced it would expand itslending program as well as accept a wider range of collateral forloans. Since then, the European Central Bank, the Swiss NationalBank, the Reserve Bank of Australia and China's Central Bank, haveall made various moves to inject liquidity into the globalfinancial network.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.