Fed moves again to boost dollar liquidity
Adds $30 billion in swap lines with four more central banks
By William L. Watts, MarketWatch
Last update: 7:49 a.m. EDT Sept. 24, 2008
Oops... it looks like the fed sees another massive deluge of sell orders coming in. probably after the congressional meeting yesterday. I think foreign investors are losing more and more confidence in the US. if the 700 bil bailout doesn't pass no amount of monetary injection will cover the amount of money that will flow out of the US markets.
LONDON (MarketWatch) -- The Federal Reserve ramped up its effort to stabilize tight credit markets Wednesday, setting up swap lines that will provide $30 billion to central banks in Australia, Sweden, Denmark and Norway for short-term loans to commercial banks.
The Fed last week made an additional $180 billion available to money markets through swap lines to major central banks.
With Wednesday's move, the U.S. central bank has made a total of $277 billion available for short-term money-market lending in dollars through its foreign counterparts.
"These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets," the Fed said in a statement. "Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises."
Central banks routinely conduct open market operations to add or drain liquidity in effort to keep the overnight rates at which banks lend money to each other near official targets, such as the U.S. Fed funds rate or the Bank of England's bank rate.
In times of turmoil, banks can become increasingly reluctant to lend to each other due to a variety of reasons, including a desire to hoard cash to build up their own capital or uncertainty about the soundness of other banks. In extreme circumstances, money markets can virtually freeze, halting the credit creation process.
As a result, the Fed and other central banks have made huge injections of dollars and other currencies into the financial system via short-term loans in an effort to maintain the credit markets.
The Fed's action last week boosted the amount available to money markets through swap lines with the European Central Bank and the Swiss National Bank and created new swap lines with the Bank of England, the Bank of Japan and the Bank of Canada.
The European Central Bank on Wednesday allotted $40 billion in overnight dollar loans in its daily auction amid strong demand. The Bank of England allotted $29.9 billion of the $40 billion in overnight dollar funds it offered Wednesday.
In a sign of easing tensions in the overnight sterling market, the Bank of England for the second day on Wednesday moved to drain 10 billion pounds ($18.4 billion) of reserves from the system.
"This action is being taken in response to conditions in the short-term money markets," the central bank said, in a statement announcing the operation. "The Bank of England continues to monitor money market conditions closely."
Overnight lending rates in dollars and other currencies have eased after spiking last week in the wake of the collapse of Lehman Brothers and mounting global worries over turmoil in the financial sector. But banks still appear reluctant to lend to each other for longer periods, leaving other short-term interest rates at elevated levels.
End-of-quarter positioning has also served to make banks reluctant to lend, pushing rates higher, analysts said.
The swap lines with Australia and Sweden will provide up to $10 billion each, while the lines with Norway and Denmark total $5 billion each.
William L. Watts is a reporter for MarketWatch in London.
