Markets see Fed liquidity move signalling earlier rate cut UPDATE

Markets see Fed liquidity move signalling earlier rate cut UPDATE

	Published : Fri, 10 Aug 2007 15:23 By : Agencies Print this Story

(Recasts, updates to add details, reaction)

WASHINGTON (Thomson Financial) - Financial markets now see the Fed cutting rates much sooner than they earlier had and many analysts think the central bank may be forced to do an emergency rate cut.

The odds of a rate cut, implied from Fed fund futures, have once again

greatly increased across the time horizon. They indicate 40 pct odds of a 0.25 pct cut this month, and 100 pct odds of a 0.25 pct cut by October, which is up from yesterday's 60% odds, according to Thomson IFR Markets.

The Federal Reserve said in a short statement today it is 'providing liquidity to facilitate the orderly functioning of financial markets', and said it would provide reserves 'as necessary' through open market operations.

'The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5.25 pct,' the Fed said.

'In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets,' it said. 'As always, the discount window is available as a source of funding.'

After the Fed statement, Robert Brusca of FAO Economics said the 'Fed funds market is not in turmoil, but showing stress.'

The discount window opening, he said, 'de-stigmatizes window borrowing for the time being encouraging banks to use and should result in amore stable funds rate, all other things equal.'

In the normal course of business, the Fed's discount window is seen as a

last resort for financial institutions in trouble.

The Fed came in early at 08:25 EST today, injecting 19 bln usd into the markets. But in an unusual move it only accepted mortgage-backed securities as collateral for today's loans.

That followed yesterday's decision to inject 24 bln usd into the market.

dennis.moore@thomson.com

dem/pik/wash/rfw

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