The U.S., European, and Swiss
central banks on Wednesday extended emergency lending
facilities for investment banks and expanded other liquidity
programs to ease credit market strains that have weighed on the
global economy for nearly a year.
The joint measures helped lift share prices in the United
States and Europe, and were a factor in pushing up U.S. bond
yields and the U.S. dollar.
The U.S. Federal Reserve said it was prolonging the
emergency credit facility for primary dealers to January 30
which had been due to expire in mid-September.
The Fed said it acted "in light of continued fragile
circumstances in financial markets," and said it would close
down the lending program once it determined credit market
conditions were no longer "unusual and exigent."
The Primary Dealer Credit Facility was launched in March
after the near bankruptcy of Bear Stearns and it marked the
first time since the Great Depression that the Fed had opened
its emergency lending to investment banks.
Some analysts said the latest action suggested the Fed
would be loathe to raise interest rates any time soon and
interest-rate futures showed traders trimming back bets on the
Fed raising rates this year.
"Until the Fed starts scaling back or eliminating its
special liquidity-providing measures, rate hikes would create a
glaring policy inconsistency -- conducting measures that
effectively lower borrowing rates while simultaneously raising
them," Michael Gregory, a senior economist at BMO Capital
Markets in Toronto, wrote in a note to clients.
The Fed also said it would offer longer-term loans to banks
under its Term Auction Facility, introducing 84-day offerings
in addition to its current 28-day loans. The TAF was
established in December to try to tamp down funding pressures.
The Fed plans alternate auctions of $75 billion in 28-day
credit, with offerings of $25 billion in 84-day funds every two
weeks. Credit outstanding at the Term Auction Facility would
total no more than $150 billion, as is currently the case.
In parallel, the European Central Bank and Swiss National
Bank said they would begin conducting U.S. dollar auctions with
84-day terms, in addition to their current 28-day offerings,
alternating on a bi-weekly basis. Auction maximums would be $2
billion for the SNB and $10 billion for the ECB.
The Fed said it would temporarily expand its dollar swap
line with the ECB to $55 billion from $50 billion. The Fed had
put in place swap lines with both the ECB and SNB so that those
central banks could provide dollars to European markets.
EXTRA LIQUIDITY HELPFUL
The announcements followed record demand for U.S. dollar
liquidity at the ECB's last 28-day auction, when banks bid for
more than four times the $25 billion on offer .
Economists and traders said the move, which pushed down
euro zone government bond and Euribor interest rate futures,
showed the seriousness of money market tensions a year after
the initial credit-market shock.
"The extra liquidity is helpful but there is more need for
funding over longer-term horizons," Commerzbank economist
Michael Schubert said.
The Fed's actions are the latest in a series of aggressive
steps, in conjunction with the ECB and the U.S. Treasury, to
calm financial market strains resulting partly from huge
writedowns by banks on mortgage related assets as U.S. house
prices have tumbled in the past year.
President George W. Bush on Wednesday signed into law a
sweeping housing market rescue package that would provide
mortgage refinancing for stressed borrowers and provide
emergency funding for mortgage market giants Fannie Mae (FNM.N)
and Freddie Mac (FRE.N).
A day earlier, the U.S. Securities and Exchange Commission
extended its crack-down on abusive short-selling in the stocks
of 19 major financial firms.
The Fed said that in addition to extending the PDCF, it
would also keep open through January 30 its Term Securities
Lending Facility, which provides liquid Treasury securities for
28 days in return for harder-to-trade collateral.
It also gave the go-ahead to the New York Federal Reserve
Bank to auction options to primary dealers to borrow Treasury
securities to ease funding pressures that often build as
financial quarters are drawing to a close.