Fed steps in again with cash

WASHINGTON -- The Federal Reserve added billions more to the banking system Wednesday in a fight to keep a credit crisis from derailing the economy.

The Dow Jones industrial average tumbled again, dropping 167.45 points to close at 12,861.47. The Dow is now more than 1,100 points below its record close above 14,000 in mid-July.

"With financial markets in disarray and the potential for a credit crunch, the Fed will have little choice but to ease policy," said Mark Zandi, chief economist at Moody's Economy.com.

By pumping an additional $7 billion into the banking system, the Fed sought to keep the federal funds rate, the interest that banks charge each other, from rising above the Fed's current target of 5.25%.

Since Aug. 9, the Fed has injected $71 billion into the banking system. The rescue effort was triggered by the shock waves when BNP Paribas, France's largest bank, froze three funds that had invested in the troubled U.S. mortgage market.

A 387-point plunge that day followed the developments in France as investors worried that many more troubled investment funds and bad debt would come to light.

The $38 billion boost from the Fed last Friday was the largest one-day cash infusion since the attacks of Sept. 11, 2001. But to many analysts, the current situation is more similar to the 1997-98 global financial crisis, which began in Thailand and eventually pushed 40% of the worldwide economy into recession.

In August 1998, Russia became the latest victim, devaluing its currency and defaulting on part of its foreign debt. That led to a severe credit crunch that toppled a giant U.S. hedge fund, Long Term Capital Management, and sent panic through U.S. credit markets. The result was a virtual halt in trading of many debt instruments.

Then-Fed Chairman Alan Greenspan and his colleagues pushed ahead with a series of one-quarter percentage point rate cuts in the fall of 1998. The moves were enough to get financial markets working again and keep the U.S. economy from recession.