The U.S. Federal Reserve, in a coordinated effort with five other central banks, flooded the European market with U.S. dollars on Wednesday in an attempt to stave off a collapse of the euro. The news comes a day after Standard & Poor's downgraded the credit rating of major banks across the globe.
The central banks, which also included those from Canada, England, Japan, Europe and Switzerland, are attempting to prevent the collapse of the euro. European banks are having difficulty finding borrowers due to news of a potential collapse. The central banks are swapping dollars for euros with these banks so they will have the resources to continue lending.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the central banks said in a joint statement.
The move is not a fix to Europe's debt problems, but is meant to provide temporary relief, a few weeks at most, so that European nations will have time to devise a solution to their debt woes.
Paul Gigot, editorial page editor for The Wall Street Journal, said, in an interview on Fox News' “America Live,” that he does not think the Fed's move will cause inflation. “In the short term, this is actually addressing a real problem, which is the inability of the banking system to supply needed money, needed credit, internally, to finance itself, particularly European banks. This is a useful exercise today.”
On Tuesday, credit rating agency Standard & Poor's downgraded the credit of 37 of the largest banks across the globe, including six U.S. banks – Bank of America, Goldman Sachs, Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo. S&P noted that the role of governments and central banks were taken into account with the downgrades.
The Fed's move also comes three days after Bloomberg News reported that the Fed has a secret loan program in which $7.7 trillion was lent out. Six banks, the same six that received a credit downgrade, received 63 percent of those loans.