Fed Pulls Cash From Banking System Again

The Federal Reserve drained cash from the nation’s banking system Monday for a second straight working day, deflating the widely held view that lower interest rates were on the way and leaving economists baffled over what the central bank might do next.

Major banks, which had been expected to cut their prime lending rates, are now likely to hold off, economists said.

“The banks will now prefer to wait,” said an economist at a large commercial bank, who spoke on condition that he not be identified. “Before today’s action, I would have expected a prime rate cut this week for sure. But now, it may be put off for the next couple of weeks.”

Last week most were convinced that the Fed was rapidly easing credit to stave off a recession and that a round of prime rate cuts to 10% from 10.5% was imminent.

Economists reached that conclusion when the Fed launched a heavy infusion of cash last Wednesday that lowered the federal funds rate, the fee that banks charge each other on overnight borrowings.