Mobilizing the Moneymen

On Wednesday, Sept. 19, money in the U.S. was almost free. The fed funds rate, at which commercial banks lend to each other overnight, sank to 0.50%--2 1/2 percentage points below the Federal Reserve's newly reduced target.

An aberration, to be sure. But Fed officials were relieved. It was a sign that their global campaign to keep the financial markets operating smoothly after the Sept. 11 terrorist attacks was bearing fruit. Over the past eight days, they had flooded the U.S. money markets with cash, cut interest rates by a half-point, and goaded central banks around the world into concerted action to avert a world economic crisis.

First priority, of course, was home. Shortly after the terrorists struck, Fed Vice-Chairman Roger W. Ferguson Jr. convened a conference call of representatives from the central bank's 12 regional branches to map out a plan. His boss, Fed Chairman Alan Greenspan, was in the air--incommunicado. The plane bringing him home from a central bankers' meeting in Switzerland had turned back. And its phone lines were jammed. Ferguson and his colleagues issued a simple statement: The Fed's discount window, the lender of last resort for commercial banks, would supply whatever liquidity was needed.

CASH DELUGE. That would be no small task. With data and phone lines to New York's financial district destroyed, players in the global markets were worried that money they were counting on--and had pledged to others--wouldn't arrive. Securities firms asked if they could tap the discount window, a step that hadn't been taken since the 1930s. The Fed's response was to flood the banking system. In addition to the billions it lent through the discount window, the Fed pumped tens of billions into the money markets through repos--securities repurchase agreements. The cash deluge peaked on Sept. 14, when the Fed flooded the banking system with $81.25 billion--many times the $5 billion or so it normally adds.

Next, the Fed acted to limit the fallout overseas. On Sept. 13, after a series of transatlantic phone calls, the Fed announced that it had set up a $50 billion currency swap with the European Central Bank (ECB) to make sure the ECB had enough dollars to meet the cash demands of banks it oversees.

Getting the ECB's president, Wim Duisenberg, to go along with interest-rate cuts was trickier. The ECB had a scheduled monetary policy meeting on Sept. 13, two days after the disaster. But Duisenberg--who had been criticized for his reluctance to cut rates with a slowdown looming--had told a European Parliament committee the day before that the bank was sticking to its usual position: Price stability is its priority. Parliamentarians were dismayed. Sure enough, the ECB held its key rate at 4.25% the next day.

On Sept. 17, Duisenberg reiterated his price-stability mantra in a speech. Markets were perplexed. Later that day, the Fed cut rates by a halfpoint. According to ECB sources, Greenspan called Duisenberg before the announcement to get him to go along with the rate cut. The pressure must have been immense. The ECB cut rates a half-point soon after, throwing market players off-guard. Now, say market sources, Duisenberg's days may be numbered, as bankers who lost money on the reversal pressure European policymakers to get him to step down.

By Rich Miller in Washington and David Fairlamb in Frankfurt

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