Central banks around the globe pumped billions of dollars into banking systems on Friday in a concerted effort to beat back a widening credit crisis, and pledged to do more if needed.
In all, central banks in Europe, Asia and North America have pumped out more than $300 billion over 48 hours in an effort to keep money flowing through the arteries of the global financial system, hoping to prevent a credit market seizure that could imperil economies.
In a rare statement of reassurance that underlined the seriousness with which it views the current bout of market stress, the U.S. Federal Reserve said it would provide cash as needed to ensure markets functioned smoothly. The statement was the first of its kind since September 11, 2001, when terror attacks brought the U.S. financial system to a virtual halt.
Ben Bernanke must feel like the captain of the Titanic, said Sherry Cooper, chief economist at BMO Capital Markets in Toronto, referring to the Fed chairman. He knows the ship has hit an iceberg but, through the dark and fog, can't see how bad the damage is.
By early afternoon, the Fed had conducted three separate operations pumping a total of $38 billion into the banking system, the largest amount for any single day since September 19, 2001. The action only partly calmed jitters and the Dow Jones industrial average was trading down more than 110 points in late afternoon trade.
The U.S. central bank was not alone.
The European Central Bank injected 61.05 billion euros ($83.61 billion), less than the record-setting 94.8 billion euros ($130.6 billion) it provided on Thursday but enough to steady panicky euro-zone credit markets.
The Bank of Japan, the Bank of Canada, the Swiss National Bank and the Reserve Bank of Australia also provided funds.
The White House weighed in to say that the Bush administration's top economic officials were on the case and that the economy remained sound notwithstanding market gyrations.
I can assure you that there are many of the president's advisers who are keeping a very close eye on all of the market activity and making sure that policies are put in place to keep our economy strong and growing, White House spokeswoman Dana Perino said.
EUROPE ON WATCH
Markets have been rocked for weeks by news of problems in banks and funds exposed to risky investments in U.S. mortgage and asset-backed markets. That triggered fears that the cheap credit that has fueled global growth might dry up.
The tremors that jolted global markets began on Thursday in France, when BNP Paribas closed three funds, sending waves of fear through European credit markets that deepening losses tied to rising U.S. mortgage market defaults could undermine the soundness of European investment firms.
Signs that euro-zone money markets were freezing up sparked the ECB's large-scale action on Thursday.
ECB President Jean-Claude Trichet told a French newspaper the central bank will continue to pay close attention to market developments in the coming period and act as needed, but he stressed that price stability remained vital for growth.
A sense of panic led financial markets to rethink where interest-rate policy in the world's major economies may be heading. Investors slashed bets on euro-zone and Japanese rate hikes and came to see a one-in-three chance of an emergency cut in borrowing costs by the Fed, while fully pricing in a reduction at the Fed's next scheduled meeting on September 18.
While the ECB acted aggressively on Thursday to begin stemming what it saw as a dangerous tide, the Fed provided only $24 billion in liquidity on that day.
Robert Eisenbeis, who retired as head of research at the Atlanta Federal Reserve Bank in January, said the U.S. central bank had taken the necessary steps to calm markets.
So far, I think they have done fine and where mistakes were made was in Europe. They overreacted and the ECB stepped in before necessary, Eisenbeis said.
Whether market volatility was worse in Europe or not, the source of much of it had made-in-America written on it as investors worldwide scrambled to assess the fallout from the once high-flying U.S. housing sector's sharp downturn.
ORDER IN U.S. MARKETS
In the euro zone, the cost for banks and financial firms to raise money overnight was holding around 4.18 percent against the ECB's 4 percent target rate, while the Fed's efforts appeared successful at wrestling overnight U.S. rates down closer to its 5.25 percent target.
The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target, the Fed said, signaling a willingness to do whatever necessary to keep markets from seizing up.
Fed policy-makers had shown limited worry about credit market conditions on Tuesday as they voted to hold rates steady and warned anew about inflation risks.
Many analysts continued to believe the Fed would be able to ride out the storm.
The world credit crisis is big enough now that you will see continued overnight operations, providing more liquidity for a while, but I don't think it means a rate cut here, said James Swanson, chief investment officer at Boston-based MFS Investment Management.
The Fed will resist being backed into a policy change just because the markets are going through some turmoil, he added.
While the central banks' concerted actions in injecting money appeared to be having some calming effect, no one thought the credit market crisis was near played out.
More subprime problems are likely to surface in coming weeks, said Moe Ibrahim, a fund manager with The Asia Debt Fund in Singapore, which manages about $365 million in assets.
There's a variety of scenarios you can envision, all the way from it being a relatively contained phenomenon to something which has much broader implications that cause the world to collapse like a deck of cards, he said.
(Additional reporting by Saeed Azhar and Vidya in Asia, Tamawa Kadoya and Richard Leong in New York, and Alister Bull in Washington)