Fed injects $5bn of emergency reserves

By Eoin Callan in Washington

Published: August 30 2007 14:26 | Last updated: August 30 2007 14:26

The Federal Reserve said on Thursday it had injected $5bn of emergency reserves into the financial system after the overnight lending rate to banks climbed above the central bank’s target rate.

The Fed extended the 14-day loans in return for collateral that included $1.85bn of mortgage-backed securities, which have triggered the recent seizures in global credit markets.

The intervention shows that banks and institutions continue to lean on special contingency measures put in place by the central bank to improve liquidity.

Investors continue to bet that the Fed will cut its main interest rate when policymakers meet formally on September 18 following a steady stream of confidence-building measures in the last two weeks.

The Fed issued an ad hoc statement at the height of the credit crunch in mid-August that 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.