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Fed Injects $200 Billion into Big Banks

Fed pumps up liquidity in funding markets to ease credit crunch

AP
March 11, 2008

Fed Announces Further Steps to Ease Credit Crunch WASHINGTON (AP) — The Federal Reserve on Tuesday ramped up efforts to provide more relief to squeezed financial institutions, a coordinated action with other central banks aimed at easing a global credit crises that threatens to push the U.S. economy into its first recession since 2001.

The Fed said it will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks. The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the U.S. government.

On Wall Street, the Fed’s action propelled stocks upward. The Dow Jones industrials jumped more than 250 points in morning trading.

The move comes as banks and other financial institutions face cash crunches.

“Pressures in some of these markets have recently increased again,” the Fed said in a statement. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannnie Mae and Freddie Mac — as collateral for the loans of Treasury securities.

“This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now,” said Ian Shepherdson, chief economist at High Frequency Economics. The odds of a deep, three-quarters of a percentage point cut in the Fed’s key interest rate next Tuesday have dropped sharply as the Fed’s new relief seemed to calm market turmoil, he said.

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