Oct. 30 (Bloomberg) -- Since the Lehman Brothers Holdings Inc. bankruptcy in mid-September froze world credit markets, the Federal Reserve has made almost $900 billion available to encourage a thaw.

There are signs of some melting as the Fed keeps responding to problems in specific parts of the market, such as its new Commercial Paper Funding Facility, which bought its first commercial paper this week.

To further its efforts, the Federal Open Market Committee yesterday, for the second time this month, cut its target for the overnight lending rate by a half-percentage point, to 1 percent. That matches the lowest level since the committee began using the rate as its benchmark two decades ago.

Fed officials acted knowing the U.S. economy is headed into a recession no matter what they did. As the FOMC statement said, ``The pace of economic activity appears to have slowed markedly'' and ``downside risks to growth remain.''

That outlook, plus the big declines in the price of oil and many other commodities, has freed the FOMC from any worry about inflation for the time being.

The Fed cut was just one more small step to ease the enormous strain in financial markets. Banks already had more than $280 billion in surplus cash sitting on deposit at Fed banks. The Fed began paying interest on that money on Oct. 9.

This is a form of so-called quantitative easing -- the provision of cash in excess of what is needed to keep interest rates close to a central bank's targeted level. It is an alternative method of providing cash to the banking system when interest rates are at or close to zero.

No Rush

Banks could be using that cash to expand their lending. But in today's environment, they aren't rushing to extend credit to borrowers.

That excess cash, when deposited with the Fed banks, now will earn a return of 0.65 percent. The yield is set at 35 basis points lower than the overnight rate target, which encourages banks to hold this ready cash without giving them a return even close to what a loan would provide.

In addition to the commercial paper facility, the Fed is backing a private initiative to provide liquidity to money- market funds. It is lending Treasury securities to keep the repurchase agreement market functioning. It has loaned more than $110 billion to primary dealers -- those companies the Fed deals with in its daily actions in money markets to keep the fed funds rate close to its target. Financial institutions have borrowed another $260 billion through the Fed's Term Auction Facility.

Discount Rate

And more than $105 billion has been borrowed at the Fed's traditional discount window, which institutions used to shun because it was taken as a sign a bank was in trouble. The window has become an acceptable source of cheap credit and yesterday became cheaper. The discount rate -- the interest rate charged on such loans -- was cut by half a point, to 1.25 percent.

In a host of ways, the Fed has done what no other central bank has done in terms of providing funds to prevent the collapse of the U.S. and world financial systems. And that includes lending hundreds of billions of dollars to foreign central banks so they could make funds available to institutions in their own countries to meet dollar needs.

Of course, the Treasury Department has played a major role as well, especially once Congress approved the $700 billion financial-industry rescue plan, part of which is being used to make capital available to banks.

Stable Rates

With little fanfare or market reaction, the department has issued more than a half-trillion worth of Treasury bills to help finance these measures. Not only did the market absorb this flood of securities without any large rise in yields, the dollar gained at the same time.

While all this hasn't opened the lending spigot yet, chances are, without these actions, credit would be much tighter than it is now. In fact, bank lending is expanding, though at a snail's pace, according to Fed figures.

Now the Treasury needs to move ahead with its original intention of using part of the $700 billion rescue money to begin buying securities tied to subprime mortgages in the absence of a ready market and no established prices.

In the meantime, expect the Fed to continue responding in imaginative ways to each alarm as it occurs.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: October 30, 2008 00:01 EDT