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Fed Plans Liquidity Injection

The central bank announces an $8 billion, 52-day repurchase agreement.

The New York

Federal Reserve

is taking action through open market operations to shore up liquidity in the financial system as banks and other financial institutions feel the year-end pinch of capital reserve requirements.

The Fed announced it will respond to "heightened pressures in money markets for funding through year-end," with a series of repurchase agreements that are more long-term than usual. The first, announced Monday, is an $8 billion, 52-day operation. Details and timing of additional operations through the rest of the year are not yet available. Typically the Fed puts liquidity into the system in 14-day increments.

"Given the high level of attention focused on the coming year end, we hope to reassure market participants of our commitment to providing sufficient balances at that time by starting to provide those balances now," said a Fed official.

Fed Extends Helping Hand to Floundering Financials

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, in particular, have come under recent scrutiny regarding their ability to maintain capital reserves, given their high level of exposure to the subprime mortgage market amid tighter lending standards.

They aren't alone. All financial institutions are under increasing pressure at the end of the year with full-year reporting, and the current credit market turmoil and expectations for economic recession only make their worries worse.

The Fed also reassured markets by noting that its trading desk "plans to provide sufficient reserves" to battle upward pressures on the federal funds rate. In other words, the Fed will provide liquidity to the market to keep banks lending to each other at the FOMC's current target rate of 4.5%.

In the recent August credit crunch, financial institutions were lending to each other well above the target rate, which precipitated several short-term liquidity injections.

The Fed has done longer-duration year-end liquidity operations in past years, though this is the largest single long-term repo in some time. The most recent was a 28-day, $5 billion operation in December 2005, a $4 billion 52-day operation in November 2004 and two $4 billion operations in 2003, according to New York Fed records.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


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