Fed injects $41 billion to relieve credit crunch

WASHINGTON - The Federal Reserve pumped $41 billion into the U.S. financial system Thursday, one of its largest cash infusions to help companies get through a credit crunch that took a turn for the worse in August.

The action comes one day after Fed Chairman Ben Bernanke and all but one of his central bank colleagues voted to slice a key interest rate for the second time in six weeks to protect the economy from the ill effects of collapse in the housing market, aggravated by the credit troubles.

The Fed on Wednesday ordered its key rate, called the federal funds rate, to be lowered by one-quarter percentage point to 4.50 percent. That followed up on a bolder, half-percentage point cut in September. Those two rate reductions might be sufficient to help the economy make its way safely through trouble spots, Fed policymakers indicated.

The funds rate affects many other interest rates charged to millions of individuals and businesses and is the Fed's most potent tool for influencing economic activity.

The Federal Reserve Bank of New York, which carries out the central bank's open market operations, moved Thursday to inject $41 billion in temporary reserves into the U.S financial system. It was an action designed to ensure that the markets — which have suffered through a period of turbulence over the last few months — functions smoothly. The cash infusion came in three separate operations.

Fed policymakers at their meeting on Wednesday noted that the "strains from financial markets have eased somewhat on balance." Still many Fed officials in the last week have described the state of financial markets as fragile. Bernanke and other Fed officials have said it will take time for the markets to fully recover from the credit crisis.

Since August, the Fed has been pumping cash into the financial system to help ease strains from the credit crunch. It also has cut its lending rate to banks — a third such cut came on Wednesday. The Fed also has ordered two reductions to its most important interest rate, the funds rate, to help the situation.