Category Archives: Fed

More USD swap lines

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The problem is the Fed doesn’t see the risks involved in this program.

They are only seeing ‘success’ as USD interest rates fall for lesser credits around the world.

The question is why they would want USD rates to come down for lower quality borrowers?

This policy does not reduce international USD borrowings.

Instead, it supports and encourages increased USD borrowings with attractive USD rates and terms.

And in unlimited quantities for the ECB, BOE, BOJ, and SNB.

Yes, unlimited USD lending to anyone who can breathe in and out lowers rates.

And as it’s going to several entities that will probably never pay it back, it’s the largest monetary handout/transfer of wealth of all time.

It’s also a policy that, once implemented, historically has become more than problematic to shut down.

US Fed launches four new currency swap lines

By David Lawder

WASHINGTON, Oct 29 (Reuters) – The Federal Reserve on Wednesday extended U.S. dollar liquidity aid beyond traditional markets, opening four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

The temporary arrangements, authorized through April 30, 2009, are aimed at easing global U.S. dollar funding shortages, the Fed said.

“These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well-managed economies,” the Fed said in a statement released in Washington.

The decision comes a day after the Fed established a $15 billion swap line with the Reserve Bank of New Zealand. The U.S. central bank now has 13 swap lines with foreign central banks.


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Updates on Fed swap lines

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Still don’t have totals for Fed USD swap lines extended to Foreign CBs.

Some info here from last week:

ECB Lending, Liabilities Surge to Records Amid Crisis (Update 1)

By Simon Kennedy

Oct. 21 (Bloomberg) — The European Central Bank’s lending to banks and its exposure to possible collateral losses jumped to records last week as the battle against the credit crisis forced policy makers to shoulder more risk.

The Frankfurt-based ECB said it loaned banks 773.2 billion euros ($1.02 trillion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September. Its liabilities to financial institutions rose to 470.3 billion euros, an increase of 4.4 percent from the previous week and up 123 percent since the start of last month.

While I’m less concerned over the ECB’s increased Euro lending it nonetheless indicates problems have not subsided.

The ECB is following the Federal Reserve and other central banks in combating the credit crunch by expanding its balance sheet as it injects more cash into the banking system. The downsides include taking on more risk as it accepts weaker collateral when lending.

“The urgency of the situation means that drastic measures need to be taken,” said David Mackie, chief European economist at JPMorgan Chase & Co. “Up until a month ago the balance sheet wasn’t growing. Now the bank is creating more and more money.”

The ECB became more aggressive after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 prompted banks to hoard cash worldwide. To spur lending, the central bank has loaned money for longer timeframes and offered banks unlimited amounts of dollars and euros. It last week loosened rules on the collateral it will accept when making loans to include lower-rated securities, certificates of deposit and subordinated debt.

Demand for Cash

The ECB today said it loaned banks 305 billion euros in its regular weekly auction at a fixed rate of 3.75 percent. It also provided $101.93 billion in a 28-day dollar tender at a fixed rate of 2.11 percent, and an additional $22.6 billion, also for 28 days, via a currency swap against euros.

Don’t know what the total USD advances outstanding are.

With the financial crisis spilling over into the economy, demand for banknotes has also jumped. The value of notes in circulation rose to 721.8 billion euros, an increase of 9.7 billion euros from the previous week and 5.4 percent from the start of last month, today’s ECB data showed.

The eurozone is facing a ‘bank run’ as depositors flee to actual cash. This puts the banking system at risk with their current institutional structure.

When Lehman Brothers sought bankruptcy protection, its Frankfurt division owed between 8 billon euros and 9 billion euros to the ECB, the Wall Street Journal reported Oct. 7, without saying where it obtained the information.

ECB President Jean-Claude Trichet has said that while the bank is assuming more risk, it is doing so because of the greater threat of financial meltdown. “We have made decisions which are increasing our risks,” Trichet said in an Oct. 19 interview with France’s RTL Radio. “We are facing a systemic liquidity problem of first importance.”

The ECB’s risk-taking may be paying off. The cost of borrowing euros for three months fell to the lowest level today since Lehman filed for bankruptcy. The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers’ Association said. That’s the lowest level since Sept. 12. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve’s target for the first time since Oct. 3.

This would be near my last choice of ways to get term rates down!


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Zero rate!

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Yes, but, of course, for the wrong reasons!

They all still act and forecast as if lower rates are expansionary.

This still has no support in theory or practice.

Outstanding government debt means the private (non-government) sectors are net savers.

Households remain net savers.

Lower rates directly cuts personal income.

And lowers costs for businesses including costs of investments that reduce costs.

I do favor a permanent zero interest rate policy.

That would mean the same amount of government spending needs less in taxes to support it (larger deficit).

Ex-Fed Gov. Meyer Makes a Case for a Zero Fed-Funds Rate

By Brian Blackstone

With the U.S. unemployment rate now expected to climb well above 7%, former Federal Reserve governor Laurence Meyer projects that Fed policymakers may have to lower the target federal-funds rate all the way to zero next year.

“However, the expected rise in the unemployment rate, paired with the rising threat of deflation, presents a risk that the FOMC will have to ease even further, perhaps all the way to a zero federal funds rate,” Meyer and Sack wrote in a research note.

Meyer and Sack said they think the jobless rate will rise to as high as 7.5% from 6.1% now. They also expect a significant gross domestic product contraction of 2.8%, at an annual rate, in the fourth quarter, after a projected 0.7% decline in the third. They also expect GDP to fall in the first quarter of next year.

Meyer and Sack expect the Fed’s preferred inflation rate gauge — the price index for personal consumption expenditures excluding food and energy — to moderate to just 1% growth, at an annual rate, by the end of 2010.

“Plugging our interim forecast into our backward-looking policy rule suggests that the federal funds rate should be cut to zero by the middle of next year,” Meyer and Sack wrote.

“Our forward-looking policy rule…gives similar results if we plug in our updated forecast, as it calls for a funds rate of about zero by early 2010,” they wrote.


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What’s next for the Fed?

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Bernanke may seek new ways to ease credit as Fed rate nears 1%

By Craig Torres

Oct. 23 (Bloomberg) — Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.

All that’s left is the Fed buying longer term treasury securities to attempt to flatten the curve, get mortgage rates down, and add reserves.

This will ‘flood the market’ with reserves that now pay interest, so they can do this without a zero interest rate policy.

Their theory is that with more reserves banks will lend more, which is not the case, both in theory and practice, as Japan proved not long ago.

Instead of the Fed buying long term securities the treasury should simply stop issuing them and issue more bills. The treasury not issuing longer term securities is functionally the same as the treasury issuing them and then the Fed buying them. But with a lot fewer transaction costs.


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Fed relying on ratings agencies?

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Ironically (?) after reading all the criticism of private sector lenders relying on ratings agencies rather than internal analysis I see this:

GE to use Fed’s commercial paper facility next week

By Rachel Layne and Scott Lanman

The Fed is setting up the special fund to buy commercial paper, and will start the program on Oct. 27. The U.S. Treasury will make a $50 billion deposit into the fund as an indication of support. The Fed said the maximum amount of commercial paper that could be funded by the facility is about $1.8 trillion.

The central bank will buy only debt with the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service respectively. The facility provides for 90-day borrowing which may help lengthen the time periods for which liquidity is available.


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Fed Chairman Bernanke’s remarks

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Nothing a payroll tax holiday can’t fix in short order.

Market tumbles further on Bernanke comments

Wednesday October 15, 12:46 pm ET

NEW YORK (Reuters) – Stocks fell to session lows on Wednesday, with the benchmark S&P 500 briefly tumbling more than 5 percent, after Federal Reserve Chairman Ben Bernanke said the economy faces a significant threat from credit market turmoil.


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Total euro CB offerings (update1)

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The total is now up to $354 billion including $100 billion in overnight funds added by the ECB.

Haven’t seen overnight funds by the Bank of England or Swiss National Bank.

Haven’t seen any Bank of Japan numbers.

ECB Leads Push to Flood Banks With Unlimited Dollars (update1)

Oct. 15 (Bloomberg) — The European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 billion in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets.

The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.277 percent. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week.


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(BN) ECB USD offerings total $270.9 billion

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The total of $279 billion is very high.

Note the seven day was higher than the one day, which could mean the longer term offerings will attract even more borrowers.

This is a lot of lending for the Fed to be doing to the ECB.

It also moves the USD debt in the Eurozone from the private sector to the public sector.

The private sector can default, declare insolvency, get ‘reorganized’, where the USD debt can be ‘converted’ to equity and functionally vanish, all to be written off by the creditors.

Public sector external debt doesn’t have that option, and thereby introduces systemic risk.

If the Eurobanks can’t/don’t repay the ECB, the Fed is left with the option of selling euros for USD for repayment.

And only if the ECB survives as a political entity.

It is not guaranteed by the national governments.

The ECB today offered banks unlimited dollar funds for seven days in the first tender of its kind, lending $170.9 billion. It also loaned an additional $100 billion for one day.


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FT: Fed’s first foray into unsecured lending

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Fed’s first foray into unsecured loans.

As per my proposal over a year ago.

Fed’s first foray into unsecured lending

by Krishna Guha
Oct. 6- The Federal Reserve is working with the US Treasury on plans for a dramatic move into unsecured lending in the hope that this extreme step could help bring credit markets back to life.

As well as unsecured lending to banks, this could lead to the Fed directly purchasing commercial paper or funding a special purpose vehicle set up to do this.

Any unsecured lending would be a radical departure for the Fed. Central banks the world over almost never make unsecured loans, and the Fed has never done so in its history.

Wrong, the swap lines to foreign commercial banks seem to me to functionally unsecured lending.

The Fed has loaned over $400 billion on this basis to the ECB so far.

It would allow the Fed to address two key problems in the financial system directly: the freezing of the term interbank money market, which covers all but overnight borrowing, and the rapid contraction of the commercial paper market.

However, the US central bank does not believe it has the legal mandate to make unsecured loans on which there is a reasonable likelihood of some loss. So it needs the Treasury to guarantee losses on the loans, probably under new authorities granted by Congress last week with the passage of the $700bn (€518bn, £402bn) Paulson plan.

The Fed and Treasury are working together on how that might work but were not ready to announce it ­on Monday.

It is awkward for the Treasury to pivot to supporting a big unsecured lending programme when the core of its pitch to Congress was the plan to purchase troubled mortgage-related assets.

There remains some chance that the US authorities are not be able to reach agreement. But the urgency of the situation – and the fact that the Fed referred to unsecured lending in a press release on Monday – suggests that it will happen.

The core of the problem in the interbank market is the lack of availability of term unsecured loans. Banks can get some term funding, but only on a collateralised basis, which helps explain the extreme demand for Treasury securities used for collateral purposes. Unsecured borrowing rates for any significant period of time – such as the three-month Libor (London interbank offered rate) – are sky high. In practice, most financial institutions are now unable to get term loans without collateral, and are funding themselves heavily in the overnight market.

This reliance on overnight money is dangerous for the financial system. It makes banks vulnerable to short-term market dislocations or loss of confidence, increasing the likelihood of failures and firesales of assets.

There are two reasons why banks cannot obtain term unsecured loans from the private market. There is a classic financial-crisis co-ordination problem, characterised as: “I won’t lend you money for a month if I think that everyone else will only lend you money for a day, allowing them to pull out tomorrow and leave me stranded.” This “roll-over” risk is a form of liquidity risk. The second reason is the credit risk of lending to banks, which has been elevated by the financial and economic turmoil .

The Fed’s existing liquidity operations – ramped up again on Monday – reduce liquidity risk by providing a large backstop source of funds. But they are imperfect substitutes for unsecured borrowing, as they are only available on a secured basis. Unsecured term loans – for instance at 100 or 150 basis points over the federal funds rate for three-month money – would provide a near-perfect substitute.

The unsecured Fed term loan rate would act as a ceiling for Libor. Banks would be able to use these loans to reduce their reliance on overnight borrowing, making the system more stable.

Moreover, banks would in theory become more willing to lend spare funds to each other, reviving the private interbank market, since the borrower or lender could turn to the Fed for unsecured loans if it suddenly needed additional liquidity.

The Fed is also actively considering using unsecured lending to shore up the collapsing commercial paper market, in which many corporations as well as financial institutions raise funds.

The US central bank could either buy commercial paper (a form of unsecured debt), or support a special purpose vehicle that would buy this debt with a liquidity line from the Fed and credit support from Treasury.

Another option under consideration is for the Fed to loan money to money market mutual funds to finance their holdings of commercial paper. The Fed is exploring this, but most money funds are wary of leveraging up and worry that this could lead to investors remaining in a fund being exposed to increasing risk. That is why the authorities are having to explore the radical option of buying commercial paper themselves.


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