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Federal Reserve Adds $38 Billion in Funds to Financial System

Reuters
Friday, 10 Aug 2007 | 3:17 PM ET

The Federal Reserve added reserves for the third time Friday, bringing the total to $38 billion, the largest amount of liquidity since the days after the September 11 attacks six years ago.

The Fed also took the unusual step of making a rare statement after the first operation -- the first time it's done so since the September 11, 2001, terror attacks -- in an effort to calm investors' fears.

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Before Wall Street's opening bell, the Fed infused $19 billion in a market operation that was conducted more than an hour before its usual time.

By mid afternoon, the Fed conducted two more cash injections -- $16 billion and $3 billion -- a highly unusual but not unprecedented occurrence for a Friday.

U.S. stock indexes sharply cut their morning losses after the Fed's second liquidity injection but losses accelerated after the third injection.

In its statement after Friday's first market operation, the Fed said it would provide liquidity as needed "to facilitate the orderly functioning of financial markets.

"In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets," it said.

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 made a similar vow in October 1987 following a precipitous decline in U.S. stock markets.

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.

The Fed has now added a total of $38 billion of temporary reserves to the banking system through 3-day repurchase agreements. That was the largest single day amount since a $50.35 billion infusion on September 19, 2001.

That followed Thursday's total injection of $24 billion in two separate operations.

"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% in early morning trade, but fell back to 5.25% shortly after the operation, in line with the target set by the central bank. It was last trading at 5.25%.

The Fed said all of the collateral accepted in the 3-day repos on Friday was mortgage-backed debt.

The Fed added a total of $87.5 billion to its reserves this week, compared with a total of $50.25 billion last week.

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