Federal Reserve holds interest rates as market fears grow
Federal Reserve holds interest rates as market fears grow
Tuesday 16th September 2008
The US Federal Reserve has held interest rates at 2 per cent as fears of global financial unrest grow.The US government did not provide a financial lifeline to investment bank Lehman Brothers, which filed for bankruptcy on Monday, leaving thousands of staff facing redundancy.
And while it had been thought that the instability of insurance giant American Insurance Group (AIG) would prompt the Federal Reserve to act, the US central bank has held rates at 2 per cent.
A statement issued at 19:16 BST confirmed that the Federal Open Market Committee decided to keep its target for the federal funds rate at 2 per cent.
The starement added that "strains in financial markets have increased significantly and labour markets have weakened further".
The Federal Reserve injected some $70 billion (£39.2 billion) in temporary loans to banks on Monday, representing its biggest cash boost since September 2001.
On Tuesday, AIG confirmed it had organised a $20 billion (£11.2 billion) bridging loan needed to keep it running, but by 15:00 BST – half an hour into trading – the insurance giant's stock fell 51.68 per cent, making up an initial slump.
An AIG collapse would have global recriminations, with the insurer having provided some $400 billion (£224.2 billion) worth of protection for companies, banks and institutions across the world.
And New York governor David Patterson said earlier that AIG had a small window to raise around $80 billion (£44.8 million) to shore up its balance sheet.
The Federal Reserve's announcement exemplifies the troubled state of the global financial system.
Following Lehman Brothers' filing for bankruptcy on Monday, Wall Street veteran Merrill Lynch was rescued by Bank of America and AIG admitted it was seeking emergency funding.
In Tokyo, the Nikkei's share average dropped 4.95 per cent to its lowest in three years, while the Dow Jones industrial average slid more than 500 points, or 4.4 per cent, in its worst performance since the September 2001 attacks, though it showed an improved performance later in the day in expectation of an interest rate cut.
Oil also fell as investors pulled out of commodities, dropping under $100 (£56) a barrel for the first time in six months.
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