Friday, August 10, 2007

Credit Market Fall-Out #19 - The Central Banks Step-In

The central banks in the US, Europe, and Asia stepped into the credit markets to help stabilize the markets. If you are the Fed there are a number of options at their disposal. If they are not willing to lower rates then you can add liquidity to the system.

Also let's put some prespective on these moves, sure a number of people are cheering, but you don’t give the patient strong medicine because they are well.

From Market Watch #1 and Market Watch #2.

The Federal Reserve said Friday it's providing liquidity "to facilitate the orderly functioning of financial markets."

In a brief statement, the Fed said it will provide reserves "as necessary" through open market operations to promote trading in the federal funds market at rates close to 5.25%.

Earlier Friday, the New York Federal Reserve said the Fed bought $19 billion in three-day repurchase agreements in mortgage-backed securities.

In its statement, the Fed said banks may experience "unusual funding needs because of dislocations in money and credit markets."

"As always, the discount window is available as a source of funding," the statement said.
This is the second day in a row that global central banks are injecting liquidity into the banking system.
The European Central Bank added $83 billion to money markets earlier Friday.

The federal-funds rate -- the rate at which banks make overnight loans to each other -- had risen sharply early Friday.

Earlier this week, the Federal Open Market Committee noted that downside risks to growth had increased because of the financial market turmoil, but said the risk of higher inflation was still its "predominant" policy concern. Fed watchers saw no hint that the Fed was leaning toward a rate cut in the statement.

From the second Market Watch article:

Central banks in Europe, Asia and the U.S. injected billions of dollars into banking systems Friday, moving to further boost liquidity in markets suffering the ripple effect of the subprime-credit crisis and saying they stood willing to provide more cash.

The European Central Bank said it had provided 61 billion euros ($84 billion) to banks in a three-day tender offer, and the U.S. Federal Reserve carried out two three-day repurchase agreements totalling $35 billion.

In Asia, the Bank of Japan supplied 1 trillion yen ($8.48 billion) after a rise in the overnight call rate. And The Reserve Bank of Australia added A$4.95 billion ($4.17 billion).

The overnight rates at which banks lend money to each other rose again Friday, with the dollar-denominated rate hitting 5.96% from 5.86% the previous day, according to data from the British Bankers' Association.

The loans by the ECB follow the roughly 95 billion euros it handed out in its biggest-ever cash injection Thursday, in the aftermath of overnight interest rates spiking.

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