Fed steps in to stem credit turmoil

updated 2:26 p.m. ET Aug. 10, 2007

WASHINGTON - The Federal Reserve, trying to calm turmoil on Wall Street, announced Friday that it will pump as much money as needed into the U.S. financial system to help overcome the ill effects of a spreading credit crunch.

The Fed, in a short statement, said it will provide “reserves as necessary” to help the markets safely make their way. The central bank did not provide details but said it would do all it can to “facilitate the orderly functioning of financial markets.”

The Fed pushed $38 billion in temporary reserves into the system Friday, on top of a similar move the day before.

Financial markets in the United States and around the globe have been shaken by fears about spreading credit problems that started with home mortgages for those with tarnished credit histories. Investors are worried that these problems will infect the larger financial system and possibly hurt the U.S. economy.

The Fed’s action may have eased some investors’ anxieties. The Dow Jones industrials were down around 90 points in afternoon trading Friday following much sharper losses near the start of the session.

Presidential spokeswoman Dana Perino said the Fed is an independent body, and the White House will not comment on its decisions.

“But I can assure you that there are many of the president’s advisers who are keeping a very close eye on all the market activity and making sure that policies are put in place to keep our economy strong and growing,” she told reporters in Kennebunkport, Maine, where President Bush is spending the weekend.

The current financial turmoil provides the biggest test yet to Federal Reserve Chairman Ben Bernanke, who took the helm last year.

The Fed’s action comes one day after a financial panic about a credit crunch swept through Europe. That prompted the Europeans to pump $130 billion into their financial system. The Fed moved Thursday to add an extra $24 billion in temporary reserves to the U.S. banking system. But that wasn’t enough to comfort Wall Street, which suffered its second-worst decline of the year that day.

The Fed on Friday chose not to cut a key interest rate, called the federal funds rate, to address the problem. That interest rate still stands at 5.25 percent. The funds rate is interest banks charge each other on overnight loans and is the Fed’s main lever to influence economic activity.

Instead, the Fed is seeking to provide reassurance to investors that the central bank will plow extra money into the U.S. financial system to make sure the credit crunch doesn’t worsen.

The Federal Reserve Bank of New York, which carries out the central bank’s market operation, moved to add $19 billion in temporary reserves Friday morning. It pumped in another $16 billion in reserves a couple of hours later, then $3 billion more in the afternoon.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Stocks start off the week with a big rally Bernanke: Fed will keep eye on sliding dollar Cost of oil reverses slide, trades near $79 Leaps of faith holding up the stock market Consumer sentiment falls to lowest in 3 months Move over, feds, as locals try stimulus too J.C. Penney's profit drops, outlook brightens Disney CEO hints at successor as profits rise Obama administration faults Senate bank bill U.S. trade gap widens more than expected Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: