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Fed, ECB inject liquidity as foreclosures rise
September 6, 2007 / 5:43 AM / 10 years ago

Fed, ECB inject liquidity as foreclosures rise

<p>A guard makes his rounds outside the Federal Reserve in Washington August 20, 2007. The Federal Reserve and European Central Bank injected liquidity into the banking systems on Thursday in moves to calm rising short-term rates amid lingering fears that the subprime housing crisis has morphed into a global credit crunch. REUTERS/Kevin Lamarque</p>

NEW YORK (Reuters) - The Federal Reserve and European Central Bank injected liquidity into the banking systems on Thursday in moves to calm rising short-term rates amid lingering fears that the subprime housing crisis has morphed into a global credit crunch.

The ECB and Bank of England also held interest rates steady, saying it was too soon to gauge the damage wrought by a global credit crisis.

The credit fears stem from the failure of homeowners to repay loans taken on during the U.S. housing boom. A report on Thursday said homes going into foreclosure again hit a record in the second quarter.

The delinquency rate on subprime loans offered to borrowers with poor credit rose to 14.82 percent from 13.77 percent at the end of the first three months of 2007, and 11.7 percent a year ago.

Global central banks have continuously supplied liquidity over the past month to keep financial markets and the economy from seizing up over credit disruptions arising from the hundreds of billions of dollars of bad housing loans.

Investors around the world hold the debt, sometimes in esoteric financial instruments that package and sort the debt and the debt risk as tradable securities.

Following a recent trend, the Fed injected $31.25 billion in three market operations in temporary reserves to supply the credit market with funds, in the largest liquidity injection into the U.S. banking system in a month.

The Fed’s liquidity injection helped push the fed funds rate down to 5.25 percent, matching the fed funds rate target, from 5.31 percent. The fed funds rate, the rate that banks charge each other for overnight loans, is the Fed’s main tool of monetary policy.

“Fed funds were under some slight pressure at 5-5/16 percent so the operations addressed that,” said Kenneth Kim, economist at Stone and McCarthy Research Associates in Princeton, New Jersey. “In addition, today’s injections were partly aimed at calming fears of a credit crunch that are still lingering.”

Earlier in the day, the ECB shelled out more than 42 billion euros in temporary overnight funds to money markets to ease tensions in the euro interbank lending market.

Demand for ready cash remained strong with liquidity-starved banks bidding for over twice that sum.

Credit turmoil stemming from a U.S. subprime mortgage debacle has created a scramble for cash, pushing short-term rates higher. By supplying massive amounts of funds in their trading operations, the banks can tamp that rate down.

The Fed on Tuesday said in its Beige Book report on the U.S. economy, said its growth continues unabated despite the housing slide. But officials warned that the troubles are not over and the Mortgage Bankers Association said the rate of U.S. home loans in foreclosure rose to a record high in the second quarter of 2007. It said homeowners in once-hot housing markets like California, Florida and other states were facing problems in refinancing their adjustable-rate mortgages.

William Rhodes, senior vice chairman of Citigroup Inc (C.N), said the U.S. economy would inevitably take a hit from the subprime crisis. How hard remained to be seen, he added.

“There will be an impact on the real economy and that depends on the impact on the consumer,” Rhodes told a meeting of the World Economic Forum in China. “If it affects in any way strongly the consumer, then you’ve got a problem.”

ECB STANDS PAT

After leaving euro zone rates at 4.0 percent, ECB President Jean-Claude Trichet cast doubt on further rises, dropping his key phrase “strong vigilance,” which he has consistently used to signal a looming hike, and pledging to watch developments in turbulent financial markets closely.

“Given the high level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn,” he told a news conference.

The Bank of England (BoE) left its rate at 5.75 percent and issued a statement saying it was too soon to fathom the impact on the British economy.

Before the liquidity crisis, stemming from mass defaults on U.S. subprime mortgages lent mainly to poor people, both central banks had been expected to tighten policy again.

The BOE cited “heightened concerns about a variety of asset-backed securities” as having “led to disruption around the world.”

“It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.”

On Wednesday, the BoE acted for the first time to temper sky-high money market rates, something other central banks have been attempting for a month with limited success.

MONEY MARKET CONCERNS

“It looks like market uncertainty has weakened the ECB’s tightening bias. As long as the markets remain nervous or fragile and the money markets malfunction, the ECB is poised to stay on the sidelines,” said Rainer Guntermann at Dresdner Kleinwort.

Investors are concerned over tests of market liquidity on the road ahead, including a $113 billion wall of outstanding commercial paper maturing next week that will require new funding, said Lehman Brothers, citing Dealogic data.

Another big test will be the financing for First Data Corp.’s (FDC.N) leveraged buyout. Arrangers for First Data’s $16 billion loan are contacting accounts to discover pricing levels needed to clear the deal, sources told Reuters Loan Pricing Corp.

Additional reporting by Mike Peacock

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