Friday, August 10, 2007

More Strong Medicine

If you are reading the financial news today, it is more like doing a play-by-play announcement of a football game then the typical daily financial news. The Fed has stepped into the financial markets for a second time today. Once again you don’t give the patient strong medicine a second time because they are well. From Yahoo:

The U.S. Federal Reserve on Friday provided the banking system with $35 billion in two cash infusions, the largest amount of liquidity in at least four months, adding ample funds for the second day running as financial markets fretted over credit conditions.

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.

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.

By late morning, the Fed injected $16 billion in a second market operation -- an unusual occurrence for a Friday. The last time the Fed conducted two operations on a Friday was more than two years ago.

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 US$323.3 bln in the past 48 hours to prevent markets from spinning into a global liquidity crunch. Short-term interest rates spiked in response to banks' decreased willingness to lend to each other.

The Fed has now added a total of $35 billion of temporary reserves to the banking system through 3-day repurchase agreements, compared with adding $7.5 billion through 3-day repurchase agreements last Friday.

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

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 $84.5 billion to its reserves this week, compared with a total of $50.25 billion last week.

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