WASHINGTON — In an act of global economic cooperation that echoed its response to the Sept. 11 terrorist attacks, the Federal Reserve on Wednesday announced an agreement with four foreign central banks to create a new method for injecting billions of dollars into the world's financial system to break up a potentially crippling logjam in credit.
The Fed said that it would lend at least $40 billion to cash-strapped U.S. banks starting next week and could supply considerably more. In addition, it will temporarily make $24 billion available to the European Central Bank and the Swiss National Bank to help meet demand for dollars in Europe.
By acting in conjunction with those institutions, as well as the Canadian and British central banks, the Fed is seeking to alleviate a problem that could hurt the United States as it struggles to avoid slipping into recession. The Fed also seeks to mitigate damage to the global economy -- especially at a time when rising U.S. exports are helping offset declines in the housing market.
The highly unusual step represents another attempt by central bank Chairman Ben S. Bernanke and his colleagues to cope with credit problems without continually paring interest rates. Some economists have blamed excessive rate-cutting for helping to fuel bubbles in stocks during the 1990s and housing during the first half of this decade.
The cooperation is not expected to have a serious effect on the value of the dollar, analysts said. In any case, federal policymakers believe a global credit crunch poses a greater danger to the American economy than a declining dollar.
Wednesday's action came after a string of interest rate cuts in the United States, Britain and Canada failed to bring down commercial rates and stimulate lending among banks that have become increasingly shy about making loans. Some economists fear that development may already have nudged the U.S. toward recession and a stalling of global economic growth.
By themselves, the Fed actions will not reverse slumping home prices or erase trouble with mortgage-backed securities that have fallen out of favor with investors because of the sub-prime home loan crisis. But analysts said that the concerted effort by the central banks would help the global financial system buy time to fix the problems on its own.
