Fed Says It’Ll Buy $38 Billion in Assets to Benefit Banking

From wire reports

Responding to credit crunch fears in the stock market, the Federal Reserve of New York said Friday it would buy a total of $38 billion in mortgage-backed, Treasury and agency assets to inject more cash into the banking system.

It was the biggest such injection since the days following the Sept. 11, 2001, terror attacks.

The Fed, in a short statement, said it will provide “reserves as necessary” to help the markets safely make their way. The central bank did not provide details but said it would do all it can to “facilitate the orderly functioning of financial markets.”

For the past few weeks, financial markets in the United States and around the globe have been shaken by fears about spreading credit problems that started with home mortgages for borrowers with tarnished credit histories. Investors are worried that these problems will infect the larger financial system and possibly hurt the U.S. economy.

On Friday, Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces “unprecedented disruptions” that may reduce profit. Countrywide’s news came after last week’s spectacular bankruptcy of American Home Mortgage, a major home lender previously thought to be healthy.

And there was an investor run last week on investment house Bear Stearns, which had been rumored to have more exposure to troubled mortgage-backed securities than it had disclosed.

The Fed’s action might have eased some investors’ anxieties. The Dow Jones industrials closed down about 31 points Friday, following much sharper losses near the start of the session. On Thursday, U.S. markets plunged, with the Dow dropping more than 387 points, its second- worst decline of the year.

Presidential spokeswoman Dana Perino said the Fed is an independent body, and the White House would not comment on its decisions.

“But I can assure you that there are many of the president’s advisers who are keeping a very close eye on all the market activity and making sure that policies are put in place to keep our economy strong and growing,” she told reporters in Kennebunkport, Maine, where President Bush is spending the weekend.

The current financial turmoil provides the biggest test yet to Federal Reserve Chairman Ben Bernanke, who took the helm last year.

The Fed’s action comes one day after a financial panic about a credit crunch swept through Europe. That prompted the Europeans to pump $130 billion into their financial system. The Fed moved Thursday to add an extra $24 billion in temporary reserves to the U.S. banking system.

The Fed on Friday chose not to cut a key interest rate, called the federal funds rate, to address the problem. That interest rate still stands at 5.25 percent. The funds rate is interest banks charge each other on overnight loans and is the Fed’s main lever to influence economic activity.

Instead, the Fed is seeking to provide reassurance to investors that the central bank will plow extra money into the U.S. financial system to make sure the credit crunch doesn’t worsen.

The Federal Reserve Bank of New York, which carries out the central bank’s market operation, moved to add $19 billion in temporary reserves Friday morning. It pumped in an additional $16 billion in reserves a couple of hours later, then $3

billion more in the afternoon.

“In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets,” the Federal Reserve in Washington said in its statement.

It told banks that the Fed’s discount window – where banks can turn in an emergency for short-term loans – is available as a source of funding.

After the Sept. 11 terror attacks, the Fed used the discount window to extend billions of dollars worth of emergency loans to banks to keep the financial system functioning.

The current meltdown in the housing and mortgage markets has caused new home foreclosures to climb to record highs and has forced some lenders out of business. Problems first sprouted in the market for higher-risk or “subprime” mortgages, which are held by people who have poor credit or low incomes. But some problems have spilled over to more creditworthy borrowers. That has led to tighter lending standards, making credit harder to get for people and businesses.

This report contains information from The Associated Press, Bloomberg News and McClatchy Newspapers .

(c) 2007 Virginian – Pilot. Provided by ProQuest Information and Learning. All rights Reserved.