Fed gives banking system $58 billion booster shot
Aggressive move helps Dow end in positive territory but analysts warn of turbulent week ahead as fears over credit crunch remain
NEW YORK - THE US Federal Reserve has pumped another US$38 billion (S$58 billion) into the financial system to soothe fears of a worldwide credit crunch, with promises of more funds ‘as necessary’.
The move on Friday was the largest single-day infusion since the aftermath of the Sept 11 attacks. It followed a fund injection of US$24 billion on Thursday.
Friday’s move, done over three separate market operations, helped the Dow Jones Industrial Average gain 0.44 per cent for the week to end at 13,239.54. The market barometer reversed a 0.63 per cent decline in the prior week and a drop of more than 4 per cent in the week before that.
The broad-market Standard & Poor’s 500 rose a more substantial 1.44 per cent over the week to 1,453.64.
‘They’ve been very aggressive and they want to make sure there’s sufficient liquidity in the financial market,’ Mr Ward McCarthy, principal at Stone & McCarthy Research in New Jersey, said of the Fed’s move on Friday. ‘It looks like they succeeded.’
Financial markets have been shaken by fears about spreading credit problems that started with home mortgage defaults in the US. That has led to tighter lending standards, making it harder for people and businesses to get credit.
Investors are worried that these problems will infect the larger financial system and possibly hurt the US economy, the global growth engine.
The Fed’s latest fund injection came on the heels of stock market tumbles around the world, some by as much as 5 per cent over two days. Central banks from Europe to Australia have since injected more than US$320 billion into the banking system to protect liquidity and shore up confidence.
‘Central banks are doing the right thing. They’re adding liquidity to a system that needs it and they will continue to do so until it doesn’t need it,’ said Mr Art Hogan, an analyst at Jefferies and Co.
The Fed’s record liquidity booster was US$81.25 billion on Sept 14, 2001. Its most potent weapon, though, would be to lower the federal funds rate, now at 5.25 per cent. That rate is the interest banks charge one another on overnight loans.
However, cutting interest rates could encourage a resurgence of the very risky mortgage lending that has caused the turmoil.
Mr Ed Yardeni, president of Yardeni Research in New York, said Federal Reserve policymakers ‘are trying to do everything they can short of cutting the federal funds rate’.
But he added: ‘I think they probably have to cut rates, and probably before their scheduled September meeting.’
In any case, analysts warn investors to brace themselves for fresh stock turmoil in the coming week as uncertainty about the credit squeeze persists.
Economists also expect a government report on housing starts on Thursday to register fewer new projects last month compared to June as homebuilders cut back on new developments.
‘As we have been saying for the last month, keep your seat belts and shoulder harnesses fastened. The ride will remain rough,’ said Mr Frederic Dickson, an equity analyst at DA Davidson.
AFP, AP
Source : Straits Times - 12 Aug 2007
Singapore Property - Buy , Sell , Rent , Invest
Mindy Yong
(+65)91002985
mindy@mindyyong.com
Motor groups want COE supply cut »« Singapore URA gives sales details for 2 Reserve List sites
