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Fed, ECB, Central Banks Coordinate to Add Liquidity
Dec. 12 (Bloomberg) -- The Federal Reserve plans to ease ``elevated'' short-term funding pressures by injecting cash to banks through auctions and providing $24 billion in currency swap lines to the European and Swiss central banks.
The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank, the Fed said in a statement in Washington. The Fed will auction term funds to banks against a ``wide variety of collateral.'' All ``generally sound'' institutions can participate, the statement said.
The central banks are taking the steps after demand for cash sent borrowing costs climbing. The Fed's previous attempts to ease the credit squeeze that began in August have failed to have lasting effects. One gauge watched by central bankers, the three- month dollar London Interbank Offered Rate, rose to 5.15 percent a week ago, the highest in almost two months.
``It's an important policy response to the deterioration in credit market conditions that we've experienced in recent months,'' said Neil MacKinnon, a former U.K. Treasury official who is chief economist at London-based hedge fund ECU Group. ``It's a coordinated effort and that's important; it suggests the central banks are ready to provide liquidity on demand.''
Stocks rallied in Europe and U.S. stock futures jumped after the announcement. Europe's Dow Jones Stoxx 50 index rose 0.5 percent to 4,473.57 at 3:10 p.m. in Frankfurt. Futures on the Standard & Poor's 500 stock index advanced 2 percent to 1,507.80.
`Under Stress'
``By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress,'' the Fed statement said.
In addition, the Federal Open Market Committee authorized ``temporary reciprocal currency arrangements,'' or swap lines, for up to six months, with the European Central Bank of as much as $20 billion and $4 billion to the Swiss National Bank ``for use in their jurisdictions.''
Yesterday, U.S. stocks had their biggest drop in a month and two-year Treasury yields plummeted after the Federal Open Market Committee lowered the benchmark rate by a quarter-point to 4.25 percent and said cumulative cuts of 1 percentage point this year should promote ``moderate growth.''
Some investors expected a larger reduction of a half-point to stave off a recession. The Fed's board also reduced the discount rate, covering direct loans to banks, by a quarter point to 4.5 percent, half of what many economists predicted.
The Fed's first auction of term funds will be $20 billion on Dec. 17. The second auction will provide up to $20 billion, taking place Dec. 20. The central bank plans two more auctions, Jan. 14 and Jan. 28, with possible additional operations thereafter, the Fed said.
