The Federal Reserve sent $41 billion of short-term reserves surging into financial markets Thursday — the biggest such move since the Sept. 11, 2001, terror attacks — as stocks plummeted over fears that losses in mortgage lending are worsening.
Analysts at CIBC World Markets downgraded Citigroup’s stock, saying the company must raise more than $30 billion in capital as write-downs on securities backed by home loans cut into the company’s bottom line. Some analysts said investors are worried about similar problems at other banks.
The cash infusion was intended to provide liquidity to financial markets by giving banks access to more money to lend. But the Dow Jones industrial average fell 362 points Thursday, or 2.6 percent.
Investors are also concerned that the Federal Reserve may be done cutting interest rates. On Wednesday, members of the Federal Reserve’s Open Market Committee said that a 25-basis-point reduction in the federal funds rate to 4.5 percent may reflect a neutral position that encourages moderate growth while keeping inflation in check (see Inman News story).
Investors were also reportedly rattled by a Commerce Department report that consumer spending grew by a less-than-expected 0.3 percent in September.
Many investors have been betting that the Fed would continue to lower the federal funds rate — the rate banks charge each other for overnight loans — to encourage borrowing and reduce the risk of recession. After the late ’90s tech boom, the Fed slashed the federal funds rate from 6.5 percent to 1 percent between Jan. 3, 2001, and June 25, 2003, to stimulate the economy.
Now, although some economists say the housing downturn could lead to a recession, the Fed remains concerned about a weakening of the dollar and inflationary pressures, including energy prices. Oil prices have soared past $90 a barrel, and the dollar has been trading at historic lows to the euro.