NEW YORK -- The U.S. Federal Reserve Friday provided the largest amount of liquidity for a single market operation in four years, adding ample funds for the second day running as markets fretted over credit conditions.
In a rare statement shortly after the operation, the Fed said it would provide liquidity as needed "to facilitate the orderly functioning of financial markets".
"In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets," it said.
The last time the central bank made a similar statement was after the Sept. 11, 2001, terror attacks, when it also said it would do what was necessary to keep markets functioning normally. The Fed had made a similar vow in October 1987 following a precipitous decline in U.S. stock markets.
Major central banks have been adding temporary additional liquidity to the banking system in the past two days as short-term interest rates spiked in response to banks' decreased willingness to lend to each other.
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In an operation conducted earlier than usual, the Fed added $19 billion of temporary reserves to the banking system through 3-day repurchase agreements, compared with adding $7.5 billion through 3-day repurchase agreements last Friday.
It was the biggest single operation for a day since August 15, 2003, when there was a $20 billion fund injection.
"Today's action indicates that (Fed policy-makers) are being more pro-active to ensure financial stability," said David Katz, chief investment officer at Matrix Asset Advisors in New York.
The fed funds rate was trading at 6 percent in early morning trade, but fell back to 5.25 percent shortly after the operation, in line with the target set by the central bank. It was last trading at 5.375 percent.
The single $19 billion fund injection followed a total $24 billion injection on Thursday in two separate operations.
The Fed said all of the collateral accepted in the 3-day repo on Friday was mortgage-backed debt. The repurchase was the largest 3-day operation in at least a year.
The Fed added a total of $68.5 billion to its reserves this week, compared with a total of $50.25 billion last week.
The central bank announced the repurchase agreement earlier than it typically would, near 8:10 a.m. (1210 GMT) instead of the typical release at 9:30 a.m. (1330 GMT).
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