The U.S. Federal Reserve Board injected $50-billion (U.S.) into the European banking system as part of its efforts to shore up the global economy after Tuesday's terrorist attacks, and economists say the Fed likely will take the extra step soon of lowering interest rates.

Yesterday's action by the Fed to provide cash to Europe was intended "to facilitate the functioning of financial markets and provide liquidity in dollars," the Fed said in a statement.

The swap agreement allows the European Central Bank to draw up to $50-billion in U.S. dollar deposits at the Federal Reserve Bank of New York, which in turn will receive equivalent deposits in euros.

The ECB will make the U.S. dollar deposits available to the 11 national central banks in Europe to meet liquidity needs related to the disruptions in the United States. The swap line will operate for 30 days.

On Wednesday, central banks in the United States, Europe, Japan and Canada pumped more than $100-billion into the international payments system to keep it operating smoothly. The Bank of Canada made $1-billion (Canadian) available yesterday, as well as during the previous two days, to help Canadian banks settle transactions.

"The Fed, the Bank of Canada and other central banks around the world have assured that they will provide whatever liquidity is necessary to prevent financial instability," said Sherry Cooper, chief economist at BMO Nesbitt Burns.

"The Fed will be the lender of last resort for financial institutions, hedge funds, mutual funds or market players in serious trouble because of the attack," she said. "The Fed will do whatever it takes to maintain financial stability worldwide."

Federal funds futures contracts climbed yesterday in the first day of trading at the Chicago Board of Trade since Tuesday, as the market priced in aggressive interest rate cuts by the Fed. Traders said the move points to a strong possibility that a rate reduction could come before the central bank's regular policy meeting Oct. 2.

"I would like to see a move when the [New York] market opens," said David Rosenberg, chief economist at Merrill Lynch Canada Inc. By October, the Fed will most likely cut interest rates by 50 basis points, and will leave the door open for further reductions.

Central banks in Europe and Canada are likely to follow the Fed's lead to deal with the uncertain climate, he said, adding that the Bank of Canada will match or even exceed the Fed's reduction.

So far this year, the Fed has slashed the federal funds rate 300 basis points to 3.5 per cent, while the Bank of Canada has lowered its overnight rate 175 basis points to 4 per cent. (A basis point is 1/100th of a percentage point.)

Ms. Cooper had been forecasting interest rate cuts by the Fed of 75 basis points by year-end, but now it may be sooner, possibly coming "in one fell swoop," she said.

Roger Ferguson, vice-chairman of the Federal Reserve, said yesterday that, despite the terror attack that has shaken the United States, U.S. financial systems were functioning "better than expected."

"We've suffered quite a blow but the financial systems have proven themselves to be quite resilient," Mr. Ferguson said in Washington.

He also reiterated that the Fed stands ready to provide liquidity as needed to ensure the smooth functioning of the financial system.

Ms. Cooper sees the economy bouncing back strongly next year as the United States rebuilds after this week's attack.