Central banks around the world swung into action Wednesday in a coordinated effort to calm financial markets and reduce the chances that the attack on the US would lead to a global economic crisis.
The Federal Reserve and its counterparts in Europe and Japan injected large amounts of money into their financial systems to reduce the possibility that panicky reactions by investors, depositors or the managers of financial institutions could lead to bank failures or some other calamity.
"The central banks out there know what they have to do, and they did it," said Carl Weinberg, chief global economist at High Frequency Economics, a consulting firm.
There were also signs that the Fed and other central banks were prepared to cut interest rates in coming days -- perhaps even before stock markets in the US reopen on Friday or Monday, but especially if Wall Street shows signs of severe distress after trading resumes.
Although the markets in Japan as well as other Asian countries plunged, those in Europe moved higher Wednesday, providing some hope that Wall Street can avoid a big drop when equity trading resumes.
Oil prices, after surging on Tuesday in the wake of the World Trade Center and Pentagon attacks, fell back Wednesday, with statements from producing nations that they would seek to keep prices stable by increasing output, if necessary. The dollar, which tumbled against many currencies on Tuesday, seemed to stabilize.
The Federal Reserve (The Fed) chairman, Alan Greenspan, made his way back to Washington on a military aircraft Wednesday from Switzerland, where he had been attending an international banking meeting. In his absence, the Fed's vice chairman, Roger Ferguson, set up a command post to monitor financial conditions in the US and to help shape the international response to the economic and financial risks.
Treasury Secretary Paul O'Neill was flying back to the US from Japan. Deputy Secretary Kenneth W. Dam said at a news conference that with some exceptions, finance, commerce and banking in the US were all operating smoothly. "The American economy is open for business," he said.
But behind the brave faces, economic policy-makers in this country and abroad were on high alert. Fearful that a crack in consumer or investor confidence or problems linked to the loss of people, communications and information at New York investment firms could set off cascading problems in the financial system, governments responded by making clear that financial institutions would have all the money they needed to weather any acute problem that might arise.
Banks around the world took them up on the offer.
The Fed reported that financial institutions made quick use on Tuesday night of the lines of overnight credit available through its discount window. Fed officials said that such borrowing was "substantially elevated above normal levels."
Injecting money into the system
On Wednesday morning, the Fed injected additional money into the financial system by purchasing US$38.25 billion worth of government bonds from investment houses. On a normal day, the Fed buys and sells no more than a few billion dollars worth of bonds.
The European Central Bank took similar action, allowing banks to borrow almost unlimited amounts to shore themselves up against the possibility of a financial crisis. Commercial and other banks in Europe borrowed more than US$60 billion, indicating considerable uncertainty about the fate of the markets and the economy.