Fed pumps $70 billion into nation's financial system

Ben Bernanke
Federal Reserve Chairman Ben Bernanke
Mark Wilson/Getty Images

Urgently trying to keep cash flowing amid a Wall Street meltdown, the Federal Reserve on Tuesday pumped another $70 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action came in two operations in which $50 billion and then another regularly scheduled $20 billion were injected in temporary reserves.

The maneuver takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of the country's financial and economic troubles.

Some believe the financial system turmoil raises the odds the Fed will cut rates. Others still predict the Fed will hold its key rate steady at 2 percent.

In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. Now, the insurance giant American International Group is dangerously wobbling. Against this backdrop, Wall Street on Monday plunged 500 points, the most since the September 2001 terror attacks.

The cash infusion Tuesday was designed to help ease a spike in the overnight lending rate between banks. A sharp rise in such borrowing costs makes banks reluctant to lend to each other and to hoard cash, worsening already tight credit conditions. Harder-to-get credit has crimped spending by consumers and business, a factor in the slowing economy.

To help grease the financial plumbing Monday, the Fed pumped a total of $70 billion into the system through open market operations.

(Copyright 2008 by The Associated Press. All Rights Reserved.)

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