Fed pumps up liquidity with other central banks to ease crunch
WASHINGTON (AFP) — The Federal Reserve, in a fresh effort to ease a global credit squeeze, moved in concert with other central banks to pump hundreds of billions of dollars of liquidity into stressed financial markets.
Among the initiatives announced by the Fed was a new auction program for commercial banks and brokerages, which will be able to swap thinly traded mortgage securities and other collateral for safer Treasury obligations.
It was the latest in a series of steps to help get credit flowing in the global financial system, which has been gridlocked by concerns about market turmoil linked to a collapse in US real estate-linked securities.
The squeeze had spread to various institutions that are imperiled by a frozen market for many types of securities, especially those backed by risky or subprime mortgages.
The Fed said it was offering 200 billion dollars in a new Term Securities Lending Facility auction, with term of 28 days instead of overnight under an existing program.
This allows primary dealers, including commercial banks and securities brokers, to obtain Treasury securities by pledging collateral such as mortgage-backed securities and other debt. Auctions will be held on a weekly basis, beginning on March 27.
The Fed also said it has authorized increases in its existing temporary reciprocal currency arrangements or swap lines with the European Central Bank and the Swiss National Bank. The Fed will provide up to 30 billion dollars to the ECN and six billion to the SNB, representing increases of 10 and two billion dollars, respectively.
The move was coordinated with the ECB and SNB along with the Bank of Canada and Bank of England. Each of the central banks "are announcing specific measures" to deal with the liquidity crunch in the global system, according to a Fed statement.
The new lending auction "is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," the Fed said in a statement.
The Fed action is designed to get more funds to banks hit by the credit crunch and thus cautious about interbank loans. By coordinating with other global central banks, the move will help provide dollars to overseas banks.
The latest action expanded an initiative announced by the Fed in December to create a Term Auction Facility (TAF) that allows commercial banks to bid for loans without the stigma of using the Fed's discount rate.
The Fed just last week boosted the size of the TAF to 100 billion dollars and announced repurchase transactions worth another 100 billion dollars to help get credit moving.
Analysts said these moves could help get cash to institutions that need it.
"The Fed is now getting creative with solutions to the credit crunch," said Andrew Busch, analyst at BMO Capital Markets.
Busch said dealers "can now provide to the Fed the stuff that they don't want" such as federal agency mortgage-backed securities "for the stuff they want" such as US Treasuries.
Brian Wesbury, economist at First Trust Portfolios, praised the Fed for finding a way to get more liquidity to markets without cutting rates.
"We believe the Fed has already provided the economy with more than enough liquidity to grow at a robust rate later this year," Wesbury said.
"However, igniting that boost from growth due to lower interest rates requires the Fed to convince the market it is finishing up its rate cuts. Otherwise, as long as consumers and businesses foresee much lower rates ahead, they have an incentive to postpone activity."
Mary Ann Hurley at DA Davidson & Co. said it remains unclear if the new action will help.
"The Fed essentially is telling the banks we will take your unwanted, your orphan securities, and the idea is that this will prompt banks to unleash their lending," she said.
"But please note that the central bank is not buying outright the troubled securities and does not deal with constraints on banks balance sheets. This is a good first step -- but it is unclear if the increase in lending will occur."
The Fed said separately its TAF auction of 50 billion dollars had 82 bidders and resulted in a rate of 2.8 percent. This implies the bank will be cutting its base federal funds rate, currently at 3.0 percent, later this month.
The European Central Bank said meanwhile it would continue to offer US dollar funding to eurozone banks, the third time it had done so in conjunction with the Fed in a new operation with a value of 15 billion dollars (9.8 billion euros).
The Swiss National Bank said Tuesday it would inject 6.0 billion dollars into the financial system. The Bank of Japan said it "welcomes" the measures.
