WASHINGTON : The Federal Reserve pumped 38 billion dollars into the banking system Friday, marking its biggest operation since the week of the 9/11 terror attacks, as it vied to shore up the US financial system. The US central bank acted after injecting 24 billion dollars Thursday into the market, amid sharp falls on global stock markets which were triggered by fears over the multitrillion dollar US mortgage market and a related credit crunch.
"The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets," the US central bank said.
The Fed, which has pumped a combined 62 billion dollars into the market in two days, said it stood ready to release more money if necessary as investors ditched mortgage securities and stocks tied to the troubled housing sector.
Concerns about the US housing and mortgage markets have swept the globe, sparking hefty declines on Asian and European stock markets and injections from other central banks.
The Fed injected an initial tranche of 19 billion dollars, followed rapidly by a second large infusion of 16 billion dollars, into the financial system in a bid to calm market turmoil. It then pumped a third tranche of three billion dollars Friday afternoon.
It said it would also "provide reserves as necessary through open market operations" to keep its short-term federal funds interest rate close to its 5.25 percent target and to boost liquidity.
The Fed, created by Congress in 1913 to ensure a safer financial system, moved amid fears on Wall Street that the widening credit crunch could stoke interest rates on bank and commercial loans and slow US economic growth.
The credit squeeze has occurred as banks revaluate their exposure to the housing sector amid surging home foreclosures.
Concern has heightened in the past month as more mortgage firms have gone out of business and several large hedge funds, which dabbled heavily in mortgage securities, have seen their portfolios ravaged.
US stock markets remained volatile in the wake of the Fed's interventions.
The Dow was down 84.30 points, or 0.64 percent, at 13,186.38 at 1810 GMT, after tumbling over 200 points in earlier trading and after diving 2.83 percent on Thursday.
"Ongoing and intensifying strains in the short-term financing markets prompted the Fed to make an unusual comment on its normal system market transactions," said Stephen Gallagher, an economist at Societe Generale.
The Fed regularly buys and sells securities, but Friday's injections were the largest since September 14, 2001, when the central bank pumped 81.25 billion dollars into the financial system following terror attacks on New York and Washington three days earlier.
"The purpose was to remind the financial markets that the Fed is a lender of last resort and will provide funds, as necessary," Gallagher said.
The Fed made its injections in return for mortgage-related securities after opting to keep its fed funds rate anchored at 5.25 percent on Tuesday, where it has been since June 2006.
Some analysts had urged the Fed to cut rates in the facing of the housing slump, but it said this week that US economic growth would likely be "moderate" and that inflationary threats remained its prime concern.
Fed chairman Ben Bernanke told Congress last month that he foresees "significant financial losses" from failed sub-prime property loans, but he said this would only have a limited effect on the world's biggest economy.
Sub-prime mortgages are home loans granted to Americans with poor finances.
Renewed fears about the mortgage market have spooked global investors, including foreign banks which invested in US mortgage securities during a property boom which fizzled out in early 2006.
Other central banks also flexed their muscles Friday to soothe overseas markets.
The European Central Bank pumped more money into the eurozone banking market, taking its cash injections to 155.85 billion euros (212.98 billion dollars) in just two days.
Central banks in Australia, Canada and Japan also injected liquidity into their markets. - AFP /ls
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