Fed extends emergency lending tools
Posted on Thursday, July 31, 2008
The Federal Reserve on Wednesday extended its emergency lending programs to Wall Street firms through January after policymakers judged that markets are still “fragile.”
The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed increased its swap line with the European Central Bank.
Wednesday’s action is the latest step in officials’ efforts to combat the yearlong credit crisis, after the Fed’s March rescue of Bear Stearns Cos. and the Treasury’s backstop for mortgage giants Fannie Mae and Freddie Mac this month.
“The U. S. is pulling out all the stops here to make sure we don’t have a terrible downturn or a collapse in the financial system,” said Allen Sinai, chief global economist at Decision Economics in Boston. “There isn’t anything else the Federal Reserve can do but to keep pumping liquidity into the system.”
The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, will now extend through Jan. 30. They would then be canceled if the Fed judges that markets “are no longer unusual and exigent,” the Fed said in a statement Wednesday.
“These facilities do indicate strains that are part of the risks in the economic outlook,” said Brian Sack, a former Fed research manager who is now senior economist at Macroeconomic Advisers LLC in Washington. Sack added that Wednesday’s decision bolstered his expectation for the Fed to hold off on raising interest rates until next year.
The Fed made its announcement “in light of continued fragile circumstances in financial markets,” the central bank stated. Officials made the decisions during a July 24 conference call and worked out details in the following days.
The gap between the threemonth London Interbank Offered Rate and the overnight index swap rate, one measure of bank funding strains, was at 0. 73 percentage point Wednesday, compared with an average of 0. 66 percentage point so far this year. Former Fed Chairman Alan Greenspan said the crisis will be over once the spread narrows past 0. 25 percentage point.
Policymakers are forecast to keep their benchmark interest rate at 2 percent when they next meet Tuesday. Traders still see a 71 percent chance of at least a quarter-point increase by yearend, futures prices show.
Chairman Ben Bernanke and New York Fed President Timothy Geithner spearheaded the introduction of three lending programs since December as the credit crisis hit Wall Street.
Bernanke flagged the likelihood of the extension in a July 8 speech, saying the Fed is “strongly committed” to financial stability. The programs represent a provision of Fed credit to nonbanks unprecedented since the Great Depression.
The Fed will start auctions of options of as much as $ 50 billion in the Term Securities Lending Facility on top of the $ 200 billion program, which loans Treasuries to securities firms in exchange for asset-backed securities and other collateral.
New York Fed officials plan to consult with the primary dealers of U. S. government bonds on the Term Securities Lending Facility options program, the district bank said in a separate statement. The options plan is aimed at providing liquidity for two weeks or less surrounding key financing periods to be identified. Further details are planned on or before Aug. 8, the New York Fed said.
The central bank also will start selling 84-day loans to commercial banks under the Term Auction Facility beginning next month, in addition to the sales of 28-day loans that have occurred since the program began in December. The biweekly sales will alternate between auctions of $ 75 billion in 28-day loans, and $ 25 billion in 84-day loans.
The Fed plans to keep the Term Auction Facility program at $ 150 billion and released a schedule indicating it will remain at that size through November.
The Fed started the lending programs for investment banks under its authority to lend to nonbanks in “unusual and exigent circumstances.” Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for “at least” six months. The central bank had not previously given an end date for the Term Securities Lending Facility.
The Primary Dealer Credit Facility has shown a zero balance for four straight weeks. The loans, once as high as $ 37 billion, fell to zero after the Fed took on a $ 30 billion portfolio of assets in June to facilitate Bear Stearns’ acquisition by JPMorgan Chase & Co.
“I would be surprised if Jan. 30 marks the end of the measures,” said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, N. C. “The credit crunch is very much with us and, if anything, spreading a bit to consumer borrowing.”
The Fed provides loans to commercial banks for as long as 90 days through the traditional discount window, which carries an interest rate of 2. 25 percent, a quarter-point higher than the Fed’s benchmark rate. Lending rose to a record daily average of $ 16. 4 billion in the week ended July 23. Information in this article was contributed by Anthony Massucci and Steve Matthews of Bloomberg News.
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