Fed vows, then pumps massive funds to calm markets
By Glenn Somerville and Tamawa Kadoya
WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Reserve on Friday sought to
reassure investors and head off spreading credit problems by vowing to provide
liquidity and injecting the most money in the banking system since shortly
after the September 11, 2001, attacks.
The U.S. central bank rarely issues statements about its market operations and
the largess of its fund injections reflect the seriousness that it views the
current disorder in credit markets.
Much of the disorder stems from problems in U.S. housing markets where defaults
on subprime mortgages to less creditworthy borrowers are rising.
With the problems spreading to Europe and affecting financial markets globally,
the Fed worked in tandem with other central banks to pump liquidity into the
banking system.
"The Federal Reserve is providing liquidity to facilitate the orderly
functioning of financial markets," the Fed said in a statement shortly before
U.S. stock markets opened on Friday and resumed a downward spiral.
The U.S. central bank said it was doing so because it anticipates banks might
encounter some difficulties amid current market turmoil.
"In current circumstances, depository institutions may experience unusual
funding needs because of dislocations in money and credit markets," the Fed
statement said, adding it will provide funds as needed to keep the fed funds
rate close to its target of 5.25 percent.
The last time the central bank made a similar statement was after the September
11, 2001, terror attacks, when it also said it would do what was necessary to
keep markets functioning normally.
The Fed pumped a total of $38 billion in temporary funds in three separate
occasions on Friday, a highly unusual move not seen since July 2000.
The three cash infusions were the largest single day amount since $50.35
billion on September 19, 2001, and more than five times the amount that was
injected a week ago on Friday.
On Thursday, the Fed added $24 billion in two separate operations, which were
somewhat larger than expected. But short-term interest rates stayed firm
despite the ample liquidity.
"Today's action indicates that (Fed policy-makers) are being more pro-active to
ensure financial stability," said David Katz, chief investment officer at
Matrix Asset Advisors in New York.
The fed funds rate was trading at 6 percent in early morning trade, but fell
back to 5.25 percent shortly after the operation, in line with the target set
by the central bank. It was last trading at 5.25 percent.
Central banks worldwide have now injected at least $326.3 billion in the past
48 hours to prevent markets from spinning into a global liquidity squeeze.
Short-term interest rates spiked in response to banks' decreased willingness to
lend to each other.
In its statement, the Fed added that, as always, its discount window was open
as a source of short-term funds for banks. Many banks regard the regard the
discount window as a lender of last resort and avoid it.
The Mulindwas Communication Group
"With Yoweri Museveni, Uganda is in anarchy"
Groupe de communication Mulindwas
"avec Yoweri Museveni, l'Ouganda est dans l'anarchie"
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