WASHINGTON -- Market turmoil Thursday surely grabbed the Federal Reserve's attention, but it is unlikely to spur the central bank into action unless it threatens the stability of the banking system or the economy.
"I think they are watching it carefully. But at this point they are not in a position to make any changes in their strategy," said Lynn Reaser, chief economist at Bank of America Capital Management in Boston.
Stock markets stumbled and interest rate futures jumped on hopes of an emergency Fed interest-rate cut after U.S. subprime mortgage problems erupted in Europe, leading the European Central Bank to pump a record amount of euros into credit markets to calm jitters.
The ECB action came after France's largest listed bank, BNP Paribas, froze 1.6 billion euros ($2.2 billion) worth of funds under management — citing U.S. subprime woes — a step that sparked wider credit worries in the money market.
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"The Fed would move if it saw a systemic risk developing with credit markets seizing up ... that scenario is not present at the moment," said Reaser.
Other Fed-watchers said the central bank had felt for a long time that credit risk was being priced too cheaply in financial markets and had signaled at its policy meeting Tuesday that recent market turmoil had not altered its view.
"The Fed made a clear statement this week that market difficulties were not enough to derail their baseline economic view, and I don't think that what has happened since will have changed that," said former Fed economist Dean Maki, chief U.S. economist with Barclays Capital in New York.
"The question is: Are markets functioning? And as the Fed looks across markets, it does not see the type of distress that would make it want to change policy at present," Maki said.
The Bank of Canada said it was talking with other central banks about market liquidity, but the Fed was silent.
President Bush said markets were in position to find their footing. "I'm told there is enough liquidity in the system to enable markets to correct," he told reporters.
The Fed on Tuesday held overnight interest rates steady at 5.25 percent and said that while downside risks to growth had increased due to tighter credit conditions and volatile markets, the economy's moderate expansion remained on track.
That did not mean it was ignoring market events. Economists said it would keep close tabs to make sure markets continued to operate smoothly while weighing incoming data for signs of whether economic activity was being impacted.
St. Louis Federal Reserve Bank President William Poole on July 31 had spelled out what it would take to get the central bank to move.
"The Fed should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment, or when financial-market developments threaten market processes themselves," Poole said.
"The market understands, I believe, that the Fed will act in due time if and when evidence accumulates that action would be appropriate," he said.
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