The New York Fed, which carries out the central bank's market operation, announced a three-day repurchase agreement of mortgage backed securities and then two more of the so-called "repo" moves to inject liquidity into the market on Friday. The Fed's maneuvers came after the fed funds rate, the amount banks charge each other for overnight loans, ticked above 6% again Friday -- well above the Fed's target of 5.25% and a sign that credit was becoming harder to obtain.
The Fed added $ 19 billion in liquidity to the market Friday morning, then another $ 16 billion and, finally, $ 3 billion.
In a repo, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks. Analysts say that this is encouraging because it is a proactive step and they are not just focused on the inflation numbers and not ignoring turmoil in the credit market. The Fed's moves Thursday and Friday follow its August meeting Tuesday at which it left short-term interest rates unchanged, as it has done for more than a year. In its statement following the meeting, the bank said its primary concern remains inflation.
But the tumultuousness of the final two sessions of the week, which followed a sharp run-up in the week's first three sessions, has some market observers wondering whether the Fed will need to take added steps to douse some of the credit fears that have gripped the markets. So while some are now calling for a rate cut at the Fed's September meeting or even sooner, others contend investors will in any case first need to gather some confidence that the subprime woes and the credit market tightening aren't lethal for the economy and the markets.
This confidence will be restored over time if the economy and the financial markets are resilient enough to overcome these kinds of announcements and view them in isolation, analysts say, in reference to disclosures such as the one Thursday from French bank BNP Paribas that it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets.
But it is premature to forecast a recession, particularly if the Fed is responsive and there is no reason we canot work our way out of this fairly quickly. However, the subprime unease is likely to continue, particularly this fall as a big batch of subprime mortgages written in 2005 and 2006 begin to reset their rates.
Part of the unease over subprime loans -- those made to borrowers with weak credit -- relates to a process known as securitization. Investors bundle together mortgages, including some subprime loans, and sell them off to institutional investors such as hedge funds and mutual funds. These buyers are hoping for the steady flow of income from homeowners making their mortgage payments. The result is that many big investors are finding it difficult to sift through their holdings and take stock of all potential subprime loans that could go bad.
Such loans sour when borrowers with poor credit find themselves unable to make their mortgage payments now that home values aren't rising as fast, or even falling, in much of the country.
Investor confidence worldwide has been shaken by the credit market problems. In Asia, stocks fell Friday after regulators including the Bank of Japan added liquidity. The European Central Bank for the second day added cash to its money markets.
These banks and others around the world haven't worked together to inject liquidity into the markets since the aftermath of the Sept. 11, 2001, attacks. But the measures, intended to keep financial markets well-oiled, also seemed to confirm investor fears of a larger problem in the credit markets that will stall corporate growth -- including the burst of takeover activity that powered stocks higher this year.
The Fed added $ 19 billion in liquidity to the market Friday morning, then another $ 16 billion and, finally, $ 3 billion.
In a repo, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks. Analysts say that this is encouraging because it is a proactive step and they are not just focused on the inflation numbers and not ignoring turmoil in the credit market. The Fed's moves Thursday and Friday follow its August meeting Tuesday at which it left short-term interest rates unchanged, as it has done for more than a year. In its statement following the meeting, the bank said its primary concern remains inflation.
But the tumultuousness of the final two sessions of the week, which followed a sharp run-up in the week's first three sessions, has some market observers wondering whether the Fed will need to take added steps to douse some of the credit fears that have gripped the markets. So while some are now calling for a rate cut at the Fed's September meeting or even sooner, others contend investors will in any case first need to gather some confidence that the subprime woes and the credit market tightening aren't lethal for the economy and the markets.
This confidence will be restored over time if the economy and the financial markets are resilient enough to overcome these kinds of announcements and view them in isolation, analysts say, in reference to disclosures such as the one Thursday from French bank BNP Paribas that it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets.
But it is premature to forecast a recession, particularly if the Fed is responsive and there is no reason we canot work our way out of this fairly quickly. However, the subprime unease is likely to continue, particularly this fall as a big batch of subprime mortgages written in 2005 and 2006 begin to reset their rates.
Part of the unease over subprime loans -- those made to borrowers with weak credit -- relates to a process known as securitization. Investors bundle together mortgages, including some subprime loans, and sell them off to institutional investors such as hedge funds and mutual funds. These buyers are hoping for the steady flow of income from homeowners making their mortgage payments. The result is that many big investors are finding it difficult to sift through their holdings and take stock of all potential subprime loans that could go bad.
Such loans sour when borrowers with poor credit find themselves unable to make their mortgage payments now that home values aren't rising as fast, or even falling, in much of the country.
Investor confidence worldwide has been shaken by the credit market problems. In Asia, stocks fell Friday after regulators including the Bank of Japan added liquidity. The European Central Bank for the second day added cash to its money markets.
These banks and others around the world haven't worked together to inject liquidity into the markets since the aftermath of the Sept. 11, 2001, attacks. But the measures, intended to keep financial markets well-oiled, also seemed to confirm investor fears of a larger problem in the credit markets that will stall corporate growth -- including the burst of takeover activity that powered stocks higher this year.
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