Banking system gets more funds
The Federal Reserve injected $17.25 billion into the banking system Thursday, and the European Central Bank was inundated with demand for fresh cash as the two central banks again took steps to shore up wobbly credit markets.
Earlier in the day, the Bank of Japan, warning that global financial turmoil would take time to settle, decided against an interest rate increase that had been considered a near-certainty as recently as last month.
The head of the biggest U.S. mortgage lender, meanwhile, complained that the Fed’s actions had yet to relieve constricted conditions in credit markets, and said the housing market slump was likely to cause a U.S. recession.
“We still have a tremendous liquidity problem,” Angelo R. Mozilo, chairman and chief executive of Calabasas-based Countrywide Financial Corp, said in an interview on CNBC.
Mozilo’s comments followed Wednesday’s announcement that Bank of America Corp. had invested $2 billion in Countrywide, a move aimed at restoring confidence in the overall financial market as well as the besieged mortgage lender.
But in a reminder that credit continued to be tight, the Fed said the U.S. commercial paper market, used by many companies to finance daily operations, had shrunk by more than 8% over the last two weeks as some investors balked at putting money in anything but the safest short-term government securities.
The Fed’s larger-than-normal infusion of fresh funds into the financial system Thursday brought to $26.5 billion the amount of money it has added since Monday.
Markets continued to be rife with speculation that the Fed would cut the federal funds rate, its key monetary policy tool. A Reuters poll of economists showed 45 of 63 thought the Fed would trim the fed funds rate at or before its Sept. 18 meeting with six of those saying it would cut before the meeting. Eighteen economists said the Fed would keep the rate unchanged.
In Tokyo, the Bank of Japan left its benchmark rate unchanged for the sixth straight month. Until fears of a liquidity crisis struck global markets, investors had expected the central bank to lift the rate by a quarter point, to 0.75%.
Bank of Japan Governor Toshihiko Fukui told reporters that adjustments in financial markets would take time. He also said he would closely watch the sub-prime mortgage crisis for any effect on U.S. growth.
In Europe, the European Central Bank added $54 billion in three-month funds to the euro interbank money market but failed to bring much relief to a market still hit by credit worries. Some 145 banks bid to borrow the money, asking for a total of $171 million in funding.
It was the first injection of three-month funds outside the central bank’s normal monthly schedule. The three-month funds are intended for smaller banks which do not take part in its weekly auctions.
Small banks have found it harder to borrow money for longer than a week since two German banks had to be bailed out because of exposure to U.S. sub-prime mortgages.
