Fed takes further steps to ease tight liquidity


The US Federal Reserve along with other central banks on Tuesday announced that they will pump more liquidity into the global financial system to ease the credit crunch.

The Federal Reserve said it will lend up to $200 billion of Treasury securities to cash-strapped financial institutions with term of 28 days instead of overnight under an existing program. “Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets,” said the Fed in a statement. “Pressures in some of these markets have recently increased again,” the Fed noted. “We all continue to work together and will take appropriate steps to address those liquidity pressures.”

The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank (SNB). Each of the central banks “are announcing specific measures” to ease the credit crunch, according to the Federal Reserve. The Fed’s lending initiative, called “Term Securities Lending Facility (TSLF)”, 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,” said the Fed in the statement. The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve said it will consult with primary dealers on technical design features of the TSLF.

In addition, the Fed also said it has authorized increases in its existing temporary reciprocal currency arrangements, called “swap lines” with the European Central Bank and the Swiss National Bank. These arrangements will now provide up to $30 billion and $6 billion to the ECB and the SNB $2 billion. The Fed extended the term of these swap lines through September 30,2008.

The ECB said Tuesday it would continue to offer US dollar funding to eurozone banks, the third time it had done so in conjunction with the US Federal Reserve. The operation, which had a value of $15 billion was “intended to continue the provision of dollar liquidity for as long as the (ECB) governing council considers it to be needed in view of the prevailing market conditions,” a statement said. The SNB declared that it would inject $6.0 billion into the global financial system. “The SNB intends to continue the provision of US dollar liquidity for as long as it deems necessary,” the bank said in a statement. The Bank of Canada and the Bank of England announced similar actions, while the Bank of Japan said it welcomed these measures and hopes that they will contribute to maintaining the functioning of the international financial markets. “Amidst the turmoil in international financial markets, Japan’s money markets continue to function relatively well thus far,” said the Japanese central bank in a statement, noting it will “continue to conduct money market operations so appropriately as to maintain market stability, including supplying sufficient fund.”

Analysts also welcomes the joint actions by the central banks, believing the moves could help get cash to institutions that need it. “It is a highly significant move. The Fed is innovating in a way that is going to push liquidity directly into the mortgage markets, where it is most needed,” said David Jones, president of DJM Advisors. On Wall Street, the Dow Jones industrial average jumped more than 400 points, the biggest one-day point gain since July, 2002. But Goldman Sachs economist Jan Hatzius speculated that the latest steps from the Fed make a more aggressive cut less likely. “This announcement makes clear that Fed officials are pulling out all the stops they can think of to deal with financial stress through the increased provision of liquidity into the system,” he wrote in a note to clients. “To the extent they see this as substituting for rate cuts, this should reduce the probability of a 75 basis point rate cut next Tuesday,” he added. (

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