Fed announces further steps to ease global credit crunch

The Board of Governors of the US Federal Reserve System today ramped up efforts to provide more relief...

The Board of Governors of the US Federal Reserve System today ramped up efforts to provide more relief to squeezed financial institutions, a coordinated action with other central banks aimed at easing a global credit crisis that threatens to push the US economy into its first recession since 2001. The Fed said it will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks. The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the US government.

The move comes as banks and other financial institutions face cash crunches. “Pressures in some of these markets have recently increased again,” the Fed said in a statement. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities.

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“This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now,” said Ian Shepherdson, chief economist at High Frequency Economics. The odds of a deep, three-quarters of a percentage point cut in the Fed’s key interest rate next Tuesday have dropped sharply as the Fed’s new relief seemed to calm market turmoil, he said.

The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27. By allowing financial institutions to put up mortgage-backed securities, where there’s little appetite for them, in return for ultra-safe Treasury securities that are in high demand, the Fed hopes that will take pressure off financial companies and make them more inclined to lend. This would ease the credit crunch.

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