Fed pumps $70B into nation's financial system

WASHINGTON - Urgently trying to keep cash flowing amid a Wall Street meltdown, the Federal Reserve on Tuesday pumped another $70 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action came in two operations in which $50 billion and then another regularly scheduled $20 billion were injected in temporary reserves.

The maneuver takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of the country's financial and economic troubles.

Some believe the financial system turmoil raises the odds the Fed will cut rates. Others still predict the Fed will hold its key rate steady at 2 percent.

In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. Now, the insurance giant American International Group is dangerously wobbling. Against this backdrop, Wall Street on Monday plunged 500 points, the most since the September 2001 terror attacks.

The cash infusion Tuesday was designed to help ease a spike in the overnight lending rate between banks. A sharp rise in such borrowing costs makes banks reluctant to lend to each other and to hoard cash, worsening already tight credit conditions. Harder-to-get credit has crimped spending by consumers and business, a factor in the slowing economy.

To help grease the financial plumbing Monday, the Fed pumped a total of $70 billion into the system through open market operations.
LINK http://news.yahoo.com/s/ap/20080916/ap_on_bi_ ge/fed_credit_crisis

Tuesday, September 16, 2008

Fed Adds $50 Billion to Banking System After $70 Billion Injection Yesterday

The Federal Reserve added $50 billion in temporary reserves to the banking system when it arranged overnight repurchase agreements, or repos.

The rate for overnight loans between banks had opened at 3.75 percent, above the Federal Reserve's targetrate, as American International Group Inc.'s credit rating cut increased banks' reluctance to lend. The rate dropped to the central bank's target of 2 percent after the cash injection.

The Fed added $70 billion in reserves to the banking system yesterday, the most since the September 2001 terrorist attacks, to bring borrowing costs down after the bankruptcy of Leman Brothers Holdings Inc. triggered a hoarding of cash. Funds opened at 3.5 percent yesterday.

``From a pure reserve perspective, the desk might not need to arrange any repos at all today,'' Wrightson ICAP analysts wrote in a note. ``From a dealer-funding perspective, another round of large morning repos may have a calming effect.''

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This is better than a depression but painful if you have paper assets. Gold has no liabilities and is debt free. It gains when the dollar is diluted, it is the anti-dollar and a mirror image of the value of the dollar which has been gaining recently because people have been liquidating assets and putting it into cash which is essentially buying dollars. This won't last as the dollar begins to erode, investors will bail out of a rapidly dropping dollar. This is an all out buy signal for Gold.

JMC