The US Federal Reserve moved to inject liquidity into the financial system yesterday as market turmoil increased and dire US employment numbers shook investor confidence.
America's central bank boosted the size of auctions of four-week funds planned for 10 March and 24 March to $50bn (£25bn) each from $30bn previously. The Fed also announced that it would make $100bn available through repurchase agreements in which it lends cash in return for collateral such as Treasury bills.
US employers slashed 63,000 jobs in February, the second straight month of cuts and the biggest reduction for five years. A 38,000 increase in government jobs stopped the cuts heading over the 100,000 mark. The Labor Department also made gloomy revisions to earlier figures, saying 41,000 jobs were created in December – half the previous estimate.
The employment figures increased fears that the world's biggest economy was heading for a recession. Warren Buffett, the world's richest man and most closely watched investor, said earlier in the week that the US was already in a recession.
The US liquidity boost came at the end of a week that saw market panic intensify and spread further as increased fears about the safety of bond investments spread to all but the safest securities. Fears of a recession drove the perceived risk of holding investment-grade corporate bonds to the highest level ever.
European credit derivative indexes widened sharply and hit all-time records as shares were sold off and concerns increased that hedge funds would face further trouble as banks demand greater security for their loans to the funds.
Traders increased bets that the Fed will cut interest rates by at least three-quarters of a point this month. Some banks expect the Fed to cut its benchmark rate ahead of its scheduled meeting on 18 March. The dollar fell to a new low against the euro as fears about the US economy and expectations of rate cuts increased.
The Fed is trying to limit damage from the credit crunch on the wider economy as banks hoard cash and rein in lending. Officials from the central bank indicated that the liquidity boost was aimed at the credit markets and was not a response to the employment figures.
The action in the US was ahead of this weekend's meeting of G10 central bankers in Basel, Switzerland. The Fed said it was "in close consultation" with other central banks.
Bankers are hoping for more concerted action from the central banks akin to the coordinated liquidity injections announced in November. Those moves helped to ease markets for a while but panic has taken hold again in recent weeks. Sterling three-month Libor, the rate at which banks lend to each other, continued to climb yesterday, reaching 5.778 per cent after easing to 5.441 per cent in January.
Richard Lambert, director general of the Confederation of British Industry, said: "I think they need to be ready for it [co-ordinated action]. The action that they took before Christmas was effective and it is important that they are ready to address real issues of liquidity in the financial system."
The Bank of England kept rates on hold this week, as expected. All eyes will be on the Bank's long-term repo operation on Tuesday. It sold £10bn of three-month loans to banks on 18 December in the first of two auctions to relieve money market interest rates. The financial industry is waiting to see whether the Bank rolls over this money or decides to make shorter-term funds available.
But many bankers now expect market turmoil to last for the rest of the year, whether central banks take coordinated action or not.
Peter Sands, chief executive of Standard Chartered, told reporters in Korea that the turbulence would continue for many months. "The financial markets' problems are starting to affect the real economy," he added.
US stocks fell for a second day, led by miners and energy companies, after the employment numbers came out. The Dow Jones fell below 12,000 for the first time since January, despite a rally by banks such as Wachovia and Citigroup on the back of the Fed's liquidity action. The Dow closed 146.7, or 1.2 per cent, lower at 11,893.7.
The FTSE 100 also fell for the second day running, ending the day down 1.15 per cent at 5,699.9, the index's lowest closing level since 23 January.