Central Banks Have Stopped Injecting Money Into the Markets for the Time Being

It looks like the central banks have stopped injecting money into the markets for the time being and some of the Asian central banks are beginning to take money out. Before everyone gets all excited and claims they are “saved”, the conditions that caused the injection have not gone away. The article in the WSJ gives specific details for each of the central banks.

Two major Asian-Pacific central banks drained cash from financial markets Tuesday, signaling a return to business as usual for the first time since market turmoil spurred global monetary authorities into crisis mode last week.

The moves by the Bank of Japan and the Reserve Bank of Australia came after their counterparts in Europe and the U.S. on Monday pumped less liquidity into the banking system than in recent days.

The European Central Bank, meanwhile, offered the euro-zone money market short-term cash for the fourth day running, as fears of contagion from the U.S. subprime crisis persist. But the amount of cash the bank pumped into the market fell far below recent days' highs, and the ECB said conditions "are now close to normal."

The ECB injected €7.7 billion ($10.48 billion) in an unscheduled operation Tuesday morning, far less than Monday's €47.7 billion, as overnight rates continued hovering just above the bank's 4% target. Last Thursday, when the overnight rates rose to 4.7%, the bank injected €95 billion, followed on Friday by a €61 billion infusion to cover the weekend.

"The ECB notes that money market conditions are now close to normal," the Frankfurt-based central bank said in a statement. "However, with this fine-tuning operation, the ECB is still offering the opportunity to cover any remaining liquidity needs." The ECB also said it allotted a further €310 billion, as part of its normal weekly market refinancing operations. That amount is in line with past weekly refinancing operations, which take place each Tuesday.

The Fed Monday also scaled back its injections, pumping a modest $2 billion into U.S. money markets, well below Friday's $38 billion. The Fed sought to convey a return to normalcy by intervening at its usual time, 9:30 am eastern, instead of earlier as it did last week.

Central banks manage economic growth and prices by setting a target for the rate on overnight loans between big banks. Then, they use open-market operations to increase or decrease the supply of funds in order to keep the market rate near the target. When the rate moves far above the bank's target rate, it signals that liquidity in the market is tight. Fears about subprime exposure have made many banks reluctant to lend to one another in recent days.