Hang on to your seats folks...

...here we go. The Federal Reserve sent $41 billion of short term reserves surging into financial markets Thursday, as stocks plummeted over worries that losses in mortgage lendig are worsening.

The Fed hasn't taken such drastic measures since after the Sept. 11, 2001 terror attacks, but the Dow Jones still fell 362 points, or 2.6 percent.

Problems at Citigroup seemed to be the trigger, with analysts at CIBC World Markets downgrading the company's stock. Citigroup, they said, needs to raise more than $30 billion in capital as write-downs on securities backed by bad mortages pummel its bottom line. Some analysts said investors are worried about similar problems at other banks (see Marketwatch story).

Investors are also fretting that the Fed is done cutting interest rates, at least for now. On Wednesday, members of the Federal Reserve's Open Market Committee said the 4.5 percent target they set yesterday could represent a neutral position that encourages moderate growth while keeping inflation in check (see Inman News story).

Some investors have been betting that the Fed would continue to lower the federal funds rate, like it did after the dot-com boom went bust, to stimulate the economy. The Fed slashed the federal funds rate from 6.5 percent to 1 percent between Jan. 3, 2001 and June 25, 2003. But with oil prices breaking the $90 a barrel mark, inflation is still a concern.

The good news? The exodus from stocks pushed down yields on 10-year Treasury notes to 4.35 percent. Will that translate into lower mortgage rates? Well, it could -- but perhaps only on loans that investors who fund mortgage lenders see as being nearly as safe as Treasurys, like the prime, conforming loans guaranteed by Fannie Mae and Freddie Mac.

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