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QUESTIONS & ANSWERS

A primer on the Federal Reserve

August 11, 2007|Scott J. Wilson | Times Staff Writer

The Federal Reserve on Friday pumped $38 billion into the U.S. financial system in response to fears that too little money was available for lending. The move followed a similar $24-billion injection Thursday.

What is the Federal Reserve?

The Fed is a quasi-governmental network of 12 Federal Reserve banks across the country. It is run by a seven-member board of governors (there are currently two vacancies), now headed by Chairman Ben S. Bernanke. The Fed was created in 1913 to help give the country a stable monetary system.

How does the Fed stabilize the economy?

If the Fed decides there is too much money in the financial markets, it sells government securities, taking in the cash that would otherwise be available for lenders. When too little money is available, it buys securities to make cash available for lending. Such "repurchase agreements" are only a temporary measure; the money must typically be paid back to the Fed within a set period of 14 days or less.

Why did the Fed decide Friday that money was tight?

The Fed has a target interest rate for lending between banks -- this is the often-discussed federal funds rate, also known as the Fed's benchmark rate -- that is currently set at 5.25%. But early Friday the Fed saw that the actual rate on bank-to-bank loans had jumped above 6%.

What did the Fed do Friday?

Early on, the Fed said it would spend $19 billion on three-day repurchase agreements involving mortgage-backed securities. When that action failed to bring down the bank-to-bank loan rate enough, the Fed announced two further injections of $16 billion and $3 billion.

Is this unusual?

The Fed is always buying or selling securities to fine-tune the monetary system, but Friday's action was the biggest since it bought $81.25 billion in securities on Sept. 14, 2001, after the 9/11 attacks.

What are other central banks doing?

The European Central Bank injected $130.6 billion on Thursday and $83.6 billion on Friday. The central banks of Canada, Japan, Switzerland and Australia also have provided funds.

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scott.wilson@latimes.com

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