Fed Adds $24 Billion to Banking System to Bring Down Rates

The Federal Reserve pumped $24 billion into the U.S. banking system Thursday in a larger-than-usual daily operation, but analysts said the move did not compare to an effort by the European Central Bank to prevent money markets from seizing up.

The Fed injected the funds as part of a regular daily operation aimed at bringing the benchmark overnight interest rates back to target. Strong demand from European banks for cash had caused the U.S. federal funds rate to spike to 5.5 percent, above the U.S. central bank's 5.25 percent target.

"I don't think there is any direct relationship (to the  ECB's operations). The injections were not coordinated," said Ward McCarthy, economist and managing director of Stone and McCarthy Research Associates, in Princeton, New Jersey.

"What the ECB did was highly unusual -- providing unlimited funds at 4 percent. That was an operation intended to relieve an extremely dire situation."

Earlier Thursday, the ECB injected a record $130 billion into euro-zone money markets. Short-term interest rates had soared when France's biggest listed bank, BNP Paribas, froze $2.2 billion in three of its funds.

Separately, the Bank of Canada released a statement saying it was ready to provide liquidity as needed.

Echoing comments he had made a day earlier, President Bush said U.S. financial markets were well-positioned to ride out a storm that had been set off by rising defaults in the U.S. subprime mortgage market, which in turn have led investors worldwide to flee risky assets.

"I'm told there is enough liquidity in the system to enable markets to correct," Bush said at a news conference in Washington.

While the U.S. Treasury Department said it was keeping a close eye on financial market activity, U.S. policy-makers showed no sign of coming to the aid of the markets.

"The Fed's liquidity injection is a normal response to funds trading above target, not an artificial offering of liquidity to calm financial markets," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

"It's a mini-panic, and we are seeing demand for short-term credit," he said. "We are not seeing a so-called 'credit crunch' in the U.S. money market."

When banks become less willing to lend to each other, the federal funds rate spikes and the U.S. central bank injects liquidity to bring it back to target.

"Keep in mind, two weeks ago on Thursday (July 26) the Fed did three open market operations on a day that was similar to today: The stock market was getting hammered, credit anxieties
were rampant and fed funds were trading above target," said McCarthy.

"So, it's not all that unusual," he said of the Fed's operations on Thursday. "There is demand for excess reserves because of increased uncertainty and consequential increased
cautiousness."

Traders also said there were other sources of cash demand that may may keep the fed funds rate above target, such as paydowns for the U.S. Treasury's quarterly refunding.