Fed, other central banks pump billions into money markets
WASHINGTON -- The Federal Reserve early Thursday announced a coordinated move with foreign central banks to help keep dollars flowing as the credit crisis continues to unfold.
The Fed said it expanded its temporary reciprocal currency arrangements, known as "swap lines," to $180 billion with the European Central Bank and central banks in Canada, England, Japan and Switzerland. Previously, the Fed had swap lines worth $55 billion with the ECB and $12 billion with the Swiss.
The lines provide dollars those institutions can lend to banks facing a U.S. dollar crunch.
The move is "designed to address the continued elevated pressures in U.S. dollar short-term funding markets," the Fed said in a statement. "These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."
The action is the latest by the Federal Reserve to help keep liquidity flowing in the financial markets as the turmoil on Wall Street has hit a fever pitch. Tuesday, the Fed announced it was providing up to $85 billion in loans to insurance giant AIG, effectively putting the government in charge of the company and allowing it to sell its assets in an orderly way.
The Fed has been increasing the swap lines since March.
"It's all hands on deck," says Richard Yamarone, director of economic research at Argus Research. "Any and every entity, Treasury, the Fed and all central banks around the world are being summoned to right the potentially sinking ship. It's in everyone's interest that the financial, banking system is kept afloat."
The Fed has been trying to tackle the problems in financial markets by pumping in added liquidity, suggesting lower interest rates may not be the appropriate cure for the credit crisis. Even if rates go lower, tight credit markets might not lead banks to lend more, given the anxiety in the markets.
The Fed this week decided to leave its target for short-term interest rates unchanged at 2%, lowest since December 2004.
But some economists say the Fed should have cut rates as the problems on Wall Street will likely spread onto Main Street, and lower rates could help.
"They missed an opportunity to get out in front of this," said Brian Bethune, director of financial economics at economic consulting firm Global Insight. "We're in the worst kind of eye of the storm right now and … to rely on liquidity insutrments alone is really going into a major battle with one arm tied behind their back."
The Fed joined the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank to pump more short-term dollar liquidity into the financial system.
Credit markets have tightened since Monday after the collapse of investment house Lehman Brothers Holdings, and central banks already provided billions Monday and Tuesday in hopes of turning the tide and to keep fearful commercial banks from hoarding cash.
In its statement, the Fed said it had authorized a $180 billion expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the ECB and up to $27 billion by the Swiss National Bank.
The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion; $40 billion for the Bank of England and $10 billion for the Bank of Canada.
Michael Schubert, analyst with Commerzbank, said the move was done in part to help banks that may not have direct access to the Fed.
"Firstly, some euro-area banks have no direct access to the Fed. Secondly, euro-area auctions for (U.S. dollars) provide better timing for euro-area banks," he said.
The ECB, which oversees the 15-nation euro zone, said it plans to provide as much as $40 billion to cash-starved banks, money that is being provided to it by the Federal Reserve swap line. The one-day operation opened for bids Thursday morning. The bank is also going to increase a 28-day tender operation the to $25 billion and an 84-day tender to $15 billion.
"Overall, the dollar funding operations conducted by the Eurosystem could reach an outstanding amount of $110 billion," the ECB said.
The Bank of England said it would inject $40 billion as part of the coordinated effort. So far, the bank has provided 25 billion pounds ($44.8 billion) to markets since Monday.
In Tokyo, the Bank of Japan said Thursday that it has also concluded a U.S. dollar swap agreement worth $60 billion with the Federal Reserve to supply U.S. dollar funds to market participants in Japan. "The bank will continue to strive to maintain market stability through money market operations," it said in a statement.
In Washington, the Fed has pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely. On Wednesday, the U.S. Treasury Department said that in an effort to help the Fed deal with unprecedented borrowing needs resulting from the current credit crisis, it will begin auctioning debt for the central bank.
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