Federal Reserve steps in to control Credit crisis
On Thursday, Federal Reserve jumped into action to loosen down the hold of weakening credit crisis, by tossing in billions of cash in the US financial market and abroad.
With an objective of easing down the financial system from hardening up, Federal Reserve Bank of New York brought $55 billion in the momentary reserves of United States. The step comes when Ben Bernanke, Fed Chairman, struggles with a financial crisis ever since the Great depression. Financial system of America has been shaken up terribly.
President Bush in his statement said that he has been closely huddled with Henry Paulson, Treasury Secretary. Trying to reassure the nervousness spread in the country, he said that financial markets are dealing with huge severe challenges. President Bush also said that in order to ease down the crisis government is taking every possible measure.
An increase in borrowing costs turns banks unenthusiastic towards lending, which deteriorates the existing tensed credit situations. The release of cash in the market was aimed at calming down the sudden rush in the lending rate among banks. At early morning hours, Federal Reserves swung in action to calm down the growing crisis. Fed in coordination with other banks flooded markets with a huge amount of dollars, also it increased the flow of cash $180 billion to $247 billion to the central banks.
In a statement issued, Federal Reserve said that the steps taken are to improve the crisis in financial markets across the globe. Fed also explained that central banks have been working closely to take the right measures for handling the existing stress in the market. Major Banks that are working in coordination with the Federal Reserve are Swiss National Bank, Bank of England, Bank of Japan, Bank of Canada and European Central Bank.
Stirred white house, spurred up presidential candidates and shocked America is the outcome of the crisis in global financial market.
President Bush called the Fed’s bonding with other central banks of throwing cash in the frozen market ‘a significant move’, on the other hand Democratic presidential contender Sen. Barack Obama also called Fed action a right step for managing operation of financial system as well as for maintaining liquidity of credit to households and businesses of America.
The step taken by Federal Reserve came during a chaotic week when the stock market fell and investors took a shelter at safer options like gold and Treasury securities. On Wednesday, for a brief moment investors were found ready to overpay for certain Treasury securities.
The week started with filing for bankruptcy by a major investment bank Lehman Brothers and commenced with purchase of Merrill Lynch by Bank of America. In order to allow the government to take charge of the firm, Fed gave an $85 billion of loan to leading insurance company American International Group. The year has witnessed failure of 11 federally insured banks and economies and the biggest economy Washington Mutual Inc., is on the edge.
On Tuesday, Fed refused to low down the borrowing costs and to undo its course in the middle of weakening financial situations, thus it left the key interest rate untouched at 2 percent.
According to Federal Reserve’s officials the freezing credit condition and financial problems have flattened the rising impact of reductions by central bank on the businesses and consumers.
Economy is losing its grip and rate of unemployment is at its five-year high, with 6.1 percent.
While some believe that a rate cut at this time would not change the situation as well as neither help the anxious consumers nor will it strengthening the economy, on the other hand those not in favor says that a rate cut would send wrong and negative signs to companies with bad bets.