Fed injects $10bn of temporary reserves

Fed injects $10bn of temporary reserves
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: August 30 2007 14:26 | Last updated: August 30 2007 14:26


The Federal Reserve said on Thursday it had injected $10bn of temporary reserves into the financial system after lending rates climbed above the central bank’s target.

The Fed extended the 14-day loans in return for collateral that included $5.2bn of mortgage-backed securities, which have triggered the recent seizures in global credit markets.

The loans were seen as showing that the central bank remained vigilant in defending its target interest rates and improving liquidity for financial institutions as part of a broad effort that includes emergency measures.

Investors continue to bet that the Fed will go beyond the confidence-building measures of the last two weeks and cut its main interest rate when policymakers meet formally on September 18.

The Fed issued an ad hoc statement at the height of the credit crunch in mid-August that said it detected an appreciable increase in risks to growth and was prepared to act to avoid adverse consequences for the US economy.

Fed Chairman Ben Bernanke is expected to reiterate this message when he addresses a gathering of central bankers in Jackson Hole, Wyoming, on Friday.

Government figures showed that the economy entered the turbulent third quarter on a stronger note than initially thought.

Gross domestic product grew by an annual rate of 4 per cent in the second quarter as business investment helped offset a deteriorating housing sector.

Economists, however said this pace of growth was unlikely to be sustained has tighter lending conditions began to squeeze business expenditure. The Fed has also recently pared back its internal growth forecasts for this year and next.

The growth estimate was in line with Wall Street economists’ forecasts and outstripped the first quarter’s anaemic 0.6 per cent rate of expansion.

Inflation in core prices – excluding food and energy costs – cooled to a rate of 1.3 per cent from 2.4 per cent in the first quarter, the lowest since the second quarter of 2003.