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Fed pumps 20b to stop stock slip { July 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWvmnW7kB4rM&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aWvmnW7kB4rM&refer=home
Fed Adds $19 Billion in Funds by Buying Mortgage Debt (Update2)
By Ye Xie
Aug. 10 (Bloomberg) -- The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.
The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.
The New York Fed's additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest opening rate since January 2001. The Fed's benchmark overnight rate is currently 5.25 percent.
``It looks like this will be enough to address the problem today because of the pace at which the funds rate moved down,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``Its not an extraordinary amount but large.''
Fed funds traded above the central bank's target for a second straight day. The Fed's benchmark was 6 percent the last time fed funds opened at this level. Stocks dropped worldwide today on speculation the losses in mortgage investments will hurt economic growth and earnings.
Rate-Cut Speculation
The European Central Bank today loaned 61.05 billion euros ($83.6 billion), pumping funds into the banking system for a second day. The ECB added an unprecedented 94.8 billion euros yesterday.
Some banks may experience ``unusual funding needs,'' the Fed said in a statement from Washington. The Fed's discount window is open and the central bank pledges to provide liquidity, the Fed said.
Some traders were speculating yesterday that the Fed will cut rates at an emergency meeting as soon as next week, according to a Merrill Lynch & Co. report published yesterday.
Interest-rate futures for August show investors see the chances of a quarter-point reduction in the Fed's key rate on any day from Aug. 16 at higher than 50 percent, Merrill strategists Joseph Shatz and Stanley Sun wrote in the report.
Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces ``unprecedented disruptions'' that may reduce profit, suggesting a credit crunch that started with the U.S. subprime market will spread.
Overnight Rates
Overnight euro rates again rose to as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.
Fed funds, the U.S. overnight interbank lending rate, closed at 4 15/16 percent yesterday, after trading between 4 3/4 percent and 5 3/4 percent, and averaging 5.38 percent, according to ICAP Plc, the world's largest inter-dealer broker.
The central bank will probably add $15 billion reserves to the banking system with weekend repurchase agreements, or repos, to keep the Fed funds rate close to its target, according to Wrightson, an ICAP research unit specializing in U.S. government finance. In a normal market condition, the Fed only needs to add $3 billion today, according to Wrightson.
In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.
Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target. They don't signal a policy shift.
Last Updated: August 10, 2007 09:23 EDT
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