That Fed rumour about the emergency rate cut. It was wrong – but not entirely. It’s not a rate cut – but it still looks like a emergency Fed prop for the US banking system.
In response to “heightened liquidity pressures in term funding markets”, the central bank has increased the term auction facility to $100bn – which allows the beleaguered banks to borrow at relatively attractive rates against a wider range of assets. The capacity of banks to park their junky collateral with the Federal Reserve has just been close to doubled at a stroke. The two March auctions will now be $50bn a piece, up from $30bn.
But there’s more. The Fed is upping its repo facilities to the tune of $100bn. Under 28-day repurchase agreements, “primary dealers may elect to deliver as collateral any of the types of securities –Treasury, agency debt, or agency mortgage-backed securities–that are eligible as collateral in conventional open market operations.”
On both scores, the Fed added, it was prepared to up the size of its operations if conditions do not improve.
And the supposedly temporary TAF, created last December, is here for foreseeable.
To provide increased certainty to market participants, the Federal Reserve will continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.
US stock futures jumped on Fed bailout elation, before falling back as it sank in that the bank was effectively saying it could not be confident of a resolution to the credit market ructions in the next half year. Added to that is the worry over what the Fed has seen building in the financial system which prompted it to act.
After all, Federal Reserve Bank of Dallas President Richard Fisher was saying just earlier today that investors should be relying on more dramatic moves from the central bank. The credit market turmoil “has to be processed,” he added.
Say one thing; do another. The TAF has been criticised for muddying the credit waters in allowing banks to borrow against all types of collateral and in increasing the reliance of the banking system on indirect government support. No wonder the futures market is 100 per cent deadset on a 75bp reduction in the benchmark rate this month.
The support now in place from the Fed is unprecedented, notes Sempra Metals’ John Kemp, with chart below. The Fed is set to provide more liquidity support this month than at any time in the past, including in the aftermath of 9/11. Despite reassuring noises from senior policymakers, this crisis still seems to be getting worse, not better.
Related links
Fed expands auctions to tackle liquidity pressures – FT.com
Fisher says credit markets may not force Fed to act – Bloomberg
US banks quietly borrow $50bn from Fed via new facility – FT.com
