Banks pump billions to calm the markets
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Banks Inject Billions to Stabilize Markets
Summary:
The U.S. Federal Reserve, along with central banks worldwide, injected over $100 billion into financial markets to mitigate a severe credit crisis, marking the largest intervention since the September 11 attacks.
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In an unprecedented move, central banks around the globe, led by the U.S. Federal Reserve, injected more than $100 billion into the financial markets to ease the ongoing credit crisis. This significant intervention, the largest since 9/11, aims to stabilize financial operations during turbulent times.
In a rare statement, the Federal Reserve emphasized its commitment to ensuring that financial markets have sufficient liquidity to function smoothly. The statement noted that banks might face unusual funding demands due to disruptions in money and credit markets.
The turmoil arose from the abrupt end of an era characterized by easy access to credit for high-risk borrowers. The subprime mortgage sector, catering to those with less-than-perfect credit histories, was the first to falter. However, the crisis has spread to other credit types, including corporate junk bonds and commercial property mortgages.
The central banks' swift actions appear to be yielding results. Despite losses of up to 3% in European stock markets early yesterday, and a steep 212-point drop in the Dow Jones Industrial Average at the opening, markets began to recuperate as the day went on. By the close, the Dow was down just 31.14 points, ending the week with a modest 0.4% gain.
Kevin Cronin, Chief Investment Officer at Putnam Investments, noted that the Federal Reserve's intervention provided necessary relief. Without continued lending, interest rates might have soared, potentially stifling economic activity.
To support the U.S. financial system, the Fed injected $38 billion on Friday, following a similar $24 billion on Thursday. Other central banks in Europe, Japan, Asia, and Canada took similar steps to ensure sufficient liquidity for regular market operations.
Art Hogan, Chief Market Analyst at Jeffries & Co., stated that central banks not only added much-needed liquidity but also signaled readiness to step in again if necessary.
The financial markets continue to face challenges. Countrywide Financial Corp. shares dropped nearly 3% after the largest U.S. mortgage lender reported worsening credit problems. Washington Mutual Inc. shares also fell by 2% amid liquidity concerns.
Recent volatility, with the Dow frequently fluctuating by triple digits, reflects financial market uncertainty despite stable economic fundamentals. Nariman Behravesh, Chief Economist at Global Insight, reassured that as long as central banks manage to calm the markets, broader economic impacts are unlikely.
The situation presents strategic considerations for the Federal Reserve, such as whether to reduce interest rates. While interest rates currently remain at 5.25%, lowering them could alleviate pressures on the real estate sector by reducing transaction costs.
Richard Yamarone, Chief Economist at Argus Research, believes the Fed aims to maintain current interest rates, as reflected in their communications to the markets.
Through strategic intervention and by maintaining steady interest rates, central banks are offering the markets the breathing room they need while asserting their commitment to long-term financial stability.
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