Further, the move is the largest coordinated international monetary policy action taken since the world's major central banks provided liquidity to ensure proper market function following the September 11, 2001, terrorist attack on the United States.

The Fed announced Wednesday that it would inject up to $40 billion in reserves into money markets via a new, temporary program called a "term-auction facility." The emergency funds would be made available to banks next week via auction process -- $20 billion each -- on December 17 and December 20. The Fed also said it is setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

"This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress," the Fed said in a statement.

The central banks' action came one day after the Fed trimmed its Federal Funds interbank interest rate by one-quarter percentage point to 4.25%, and cut the discount rate it charges banks for loans by the same amount, to 4.75%. It was the third time since September that the Fed had lowered interest rates.

Discount window stigma

The new facility became necessary because important market interest rates had remained well above the 4.25% Fed funds rate, economist David H. Wang told BloggingStocks on Wednesday. Those rates remained high in part due to the reluctance by banks to lend to one another, and by banks' unwillingness to borrow money from the Federal Reserve's discount window, he said.

Traditionally, the Fed's discount window would be the mechanism banks would use to meet liquidity needs. However, there is a stigma attached to "bellying up to Fed" as it is called in Wall Street circles, as it signals to other banks that the borrowing bank has not effectively managed its liquid assets.

That "discount window" reluctance has exacerbated the credit crunch, many economists agree.

"Essentially, this is the Fed saying to the banks, 'Alright, you're not lending to each other, and you're embarrassed or reluctant to borrow funds from the Fed's discount window? Well, here's another option: loans from the term-auction facility,'" Wang said. "Given current concerns about subprime asset defaults, it's a good step by the Fed and the other central banks to maintain financial system liquidity."

The world's major central banks have been working to restore liquidity following the first wave of subprime mortgage and related asset defaults in August 2007 prompted both an increase in interest rates and a substantial reduction in lending -- across loan categories: individual, institutional, and corporate.

Fed's focus: market function

Independent currency trader Andrew Resnick told BloggingStocks on Wednesday that a key feature in the Fed's action was its universality.

"The Fed's action is not aimed at any one particular institution, but at the markets," Resnick said. "It's the Fed's way to say, 'We know that some loans are bad, and that more mortgage defaults are up ahead, but that fact should prevent good-credit institutions from getting credit, and certainly not freeze up the credit markets.' Clearly the Fed views banks' unwillingness to lend and to lend to each other as a threat to economic growth."

Economist Steve Affinito also agreed with the Fed's coordinated action, but underscored that investors in stocks, or bonds, should not interpret the Fed's action as a panacea or a quick fix to the nation's economic problems. The financial markets, and in particularly the U.S. economy, have to work through what could be up to 500,000-700,000 more housing foreclosures.

"Depending on the scope of the Bush administration's subprime mortgage assistance plan, we're looking at up to 700,000 more [housing] defaults and foreclosures, and that has to affect the bond, banking, and housing sectors, as well as the U.S. economy," Affinito said. "That's a considerable economic drag, so no one should expect growth to magically re-accelerate next year. In 2008, we're going to need more economic stimulus, and more work by the Fed to both keep the credit markets functioning and the economy growing."