Central banks add cash to avert crisis of confidence
Sunday, 12 August 2007
NEW YORK Aug 11 (Bloomberg): Central banks in the US, Europe, Japan, Australia and Canada added about $136 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged more ``as necessary,'' in a statement unprecedented since after the Sept. 11, 2001, attacks.
Money market rates rose worldwide the past two days on evidence the subprime crisis is spreading after global investors piled into US securities backed by mortgages. By the end of the day, the central bank actions helped spark a turnaround in American stocks and drive the US overnight bank-lending rate below the Fed's target.
``They accomplished their short-term mission to make sure the market stabilized ahead of the weekend,'' said David Resler, chief economist in New York at Nomura Securities International Inc. ``It remains to be seen how much more they'll have to do.''
The US federal funds rate opened at 6 per cent, a six-year high. It sank as low as 1 per cent in late trading, according to ICAP Plc, after the New York Fed staged three repurchase operations, buying assets including mortgage-backed securities. The total of $38 billion, following $24 billion yesterday, was the highest amount of temporary funds since Sept. 12, 2001.
``The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' said Alice Rivlin, a former Fed vice chairman who's now at the Brookings Institution in Washington.
Fed policy makers just three days ago held their target for the federal funds rate, the overnight lending rate between banks, at 5.25 per cent. Fed Chairman Ben S. Bernanke and his colleagues acknowledged in their statement that markets were ``volatile'' and risks to growth had risen. Yet they reiterated, in language used since March, that inflation was the ``predominant'' concern.
Today, the Fed said in an unscheduled statement that it would add money as needed to steer the federal funds rate ``close to'' the 5.25 per cent target. Officials also noted that direct loans through the Fed's discount window are available ``as always.''
``They certainly calmed the markets,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``There's nothing that has been done yet by the Fed that implies that they will or for that matter will not cut the funds rate.''
The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds yesterday that had to be paid back today. Overnight euro rates again rose as high as 4.27 per cent today, compared with the ECB's benchmark rate of 4 per cent.
The ECB is ``giving the markets the appropriate liquidity,'' ECB President Jean-Claude Trichet told daily newspaper Ouest- France in an interview.
The bank is paying ``great attention to the markets,'' he said.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged more ``as necessary,'' in a statement unprecedented since after the Sept. 11, 2001, attacks.
Money market rates rose worldwide the past two days on evidence the subprime crisis is spreading after global investors piled into US securities backed by mortgages. By the end of the day, the central bank actions helped spark a turnaround in American stocks and drive the US overnight bank-lending rate below the Fed's target.
``They accomplished their short-term mission to make sure the market stabilized ahead of the weekend,'' said David Resler, chief economist in New York at Nomura Securities International Inc. ``It remains to be seen how much more they'll have to do.''
The US federal funds rate opened at 6 per cent, a six-year high. It sank as low as 1 per cent in late trading, according to ICAP Plc, after the New York Fed staged three repurchase operations, buying assets including mortgage-backed securities. The total of $38 billion, following $24 billion yesterday, was the highest amount of temporary funds since Sept. 12, 2001.
``The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' said Alice Rivlin, a former Fed vice chairman who's now at the Brookings Institution in Washington.
Fed policy makers just three days ago held their target for the federal funds rate, the overnight lending rate between banks, at 5.25 per cent. Fed Chairman Ben S. Bernanke and his colleagues acknowledged in their statement that markets were ``volatile'' and risks to growth had risen. Yet they reiterated, in language used since March, that inflation was the ``predominant'' concern.
Today, the Fed said in an unscheduled statement that it would add money as needed to steer the federal funds rate ``close to'' the 5.25 per cent target. Officials also noted that direct loans through the Fed's discount window are available ``as always.''
``They certainly calmed the markets,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``There's nothing that has been done yet by the Fed that implies that they will or for that matter will not cut the funds rate.''
The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds yesterday that had to be paid back today. Overnight euro rates again rose as high as 4.27 per cent today, compared with the ECB's benchmark rate of 4 per cent.
The ECB is ``giving the markets the appropriate liquidity,'' ECB President Jean-Claude Trichet told daily newspaper Ouest- France in an interview.
The bank is paying ``great attention to the markets,'' he said.