The Federal Reserve's strategy of increasing liquidity rather than resorting to a cut in the benchmark interest rate survived a third day.

Yields on Treasury bills rose yesterday after the New York Fed lowered the cost of borrowing securities from its own portfolio to ease a shortage in the market.
The action followed a reduction in the Fed's rate on direct loans to banks on Aug. 17, the impact of which officials said they need time to assess.
Chairman Ben S. Bernanke wants to avoid an emergency easing of monetary policy, contrasting with predecessor Alan Greenspan, who cut the federal funds rate target three times in 1998 after the collapse of Long Term Capital Management LP. Richmond Fed Bank President Jeffrey Lacker said Tuesday that policy must be guided by the outlook for economic growth and prices, not entirely by markets.
“We did use the fed funds rate and that may have been a mistake,” said former Fed Vice Chairman Alice Rivlin, who voted for the 1998 rate cuts. It might have been smarter to try what they are trying.
Lacker said in a speech to a conference in Charlotte, North Carolina yesterday that while the credit crunch and gyrations in financial markets has the potential to hurt growth, signs so far indicate business and consumer spending will continue.
In response to a question, Lacker also underscored the Federal Open Market Committee's determination not to insure poor investments with a cut in the federal funds rate.
“The Federal Reserve isn't responsible for the size of credit spreads,” he said.
After the rate cuts in 1998, the economy strengthened and stock prices soared, Rivlin noted, leaving the Fed open to criticism that the reductions were a mistake. Rivlin is now director of the economic studies program at the Brookings Institution in Washington.
The Fed's current strategy showed some signs of success Tuesday as yields on three-month Treasury bills climbed the most since 2000 and those on commercial paper backed by assets such as mortgages slipped.
The three-month bill yield increased 0.52 percentage point to 3.61 percent late yesterday as demand for the shortest-dated government debt waned. Top-rated asset-backed commercial paper maturing in one day yielded 5.92 percent, down from 5.99 percent, posting the first drop in three trading days.
“The flight to safety may be diminishing a bit,” said Holly Liss, a bond saleswoman in Chicago at Citigroup Global Markets Inc. We're seeing more calming of the market as T-bill rates come back to normal.
Lacker said the “jury is still out” on whether the Fed has done enough to improve trading in the $1.1 trillion market for asset-backed commercial paper.
Investors and economists still bet that Bernanke will have to reduce the benchmark lending rate between banks, now at 5.25 percent, by at least a quarter point on or before the Sept. 18 meeting.
“Financial volatility and the seizing up of credit markets raises the probability” of a recession, said Steven Einhorn, vice-chairman of New York hedge fund Omega Partners Inc. The Fed needs to be proactive and not wait.
Senate Banking Committee Chairman Christopher Dodd said Bernanke agreed to use all of the tools at his disposal to restore stability in markets roiled by the subprime mortgage crisis. He added that he didn't ask Bernanke to cut the federal funds rate and that the Fed chief didn't pledge to do so.
The central bank on Aug. 17 cut the so-called discount rate half a percentage point to 5.75 percent to direct more cash to companies starved for short-term financing while avoiding an emergency reduction in its broader lending-rate target.
(Source: Bloomberg