Jay Hancock's blog: Worried Fed plows $35 billion into markets - Economic navigation and sightseeing

It happened this morning, and it's a massive intervention -- the biggest since right after 9/11, says Bloomberg News. What's more, the Fed isn't just buying Treasury paper -- its usual method of injecting money into the economy. It is also buying Fannie Mae and/or Freddie Mac bonds, which are backed by home mortgages. The Fed is obviously responding to yesterday's stock market pain, plunging stock markets worldwide and large short-term borrowing by U.S. banks to shore up their own liquidity.

The overnight federal funds rate, tied to loans banks use to top off their required capital at the end of every day, rose sharply this week -- way past the Fed's 5.25 percent target. That indicates some banks are borrowing heavily to stay liquid. To get the overnight rate back to its target, the Fed intervened this morning with the $35 billion injection. Yesterday it injected $24 billion, news reports say.

It's not unheard of for the Fed's open-market operation to buy mortgage paper. But it's unusual. And in this case it's a telling indicator that the Fed is as worried about the mortgage finance market as many private investors. The Fed also issued a rare statement announcing it was providing liquidity.

UPDATE: 3:20 p.m. Fed has pumped another $3 billion into the credit markets, according to the Associated Press.

Comments

The housing bubble, following collapse and now market drop were largely the result of easy money, and the answer to this development is more easy money?

I'm sympathetic that the Fed feels it must do something, but I feel this is tantamount to giving a drug addict some heroin because he went into withdrawl.

Perhaps, some withdrawl is needed, much like what happened in the early 80's when the Fed stopped the easy money.

Some may say that was different because we had double digit inflation, but we have more inflation than we realize now. We just choose not to include assets, such as real estate, into our definition of inflation. Sure our consumer items, not including food and energy, may have gone up 3% a year this decade, but housing costs doubled. And those housing cost doubled in large part - yes there were other factors -due to easy money.

Posted by: Robert | August 11, 2007 2:26 PM

Jay,

Thanks for all your great work. Someone in the Baltimore Sun needs to digest the following document for the public

SYSTEMIC RISK:
FANNIE MAE, FREDDIE MAC
AND
THE ROLE OF OFHEO
http://www.ofheo.gov/Media/Archive/docs/reports/sysrisk.pdf

The report generalizes far beyond Fannie and Freddie. The Director of OFHEO was forced to resign as a result of this truth-telling report.

I don't want to bail out another bunch of "free marketeers" like we're still doing for the S&L scamers.

Thanks

Posted by: GDAEman | August 12, 2007 2:52 PM