Fed moves to head off funding crisis
By Paul J Davies and Michael Mackenzie in London and Ralph Atkins in Frankfurt
Published: November 26 2007 16:28 | Last updated: November 26 2007 19:06
The US Federal Reserve aggressively ramped up its efforts to head off a new year’s funding crisis on Monday by giving an unlimited promise to inject to whatever cash was necessary to stop the overnight money markets freezing up.
It said it would inject enough cash to stop the overnight bank borrowing rate rising above its target rate of 4.5 per cent at year end. The first of a series of long-term operations to span the new year will start with a buying back of $8bn of Treasuries and other securities in a repo deal that matures on January 10.
This means that banks can lock in funds to carry over past December 31 and alleviate balance sheet constraints associated with the present credit squeeze.
The move comes as HSBC unveiled plans to take $45bn of mainly complex debt investments on to its balance sheet to end uncertainty surrounding its structured investment vehicles in the latest sign of the pressure banks are experiencing as a result of the credit squeeze.
The UK-listed bank said its decision to bail out its structured investment vehicles (SIV) would provide certainty for investors in the funds, for HSBC shareholders and for the bank itself and could help support the broader market by removing the threat of a firesale of the assets its vehicles held.
However, its decision to go it alone could be a blow for the US banks attempting to push through a US Treasury-backed plan to create the so-called super SIV by taking a large potential collaborator out of the game.
However, Citigroup, Bank of America and JPMorgan, the banks involved have said they will carry on alone if necessary.
The latest Fed moves, which coincide with new expected money market operations by the European Central Bank today, come amid increasing fears the financial system is moving into a new period of turmoil that could spill over into the real economy.
In statement, the New York Fed, which conducts the Fed’s liquidity operations, said it would “provide sufficient reserves to resist upward pressure on the federal funds rate above the Federal Open Market Committee’s target rate around year-end.”
The Fed often conducts term repo operations to address year-end funding needs but the $8bn operation announced yesterday is the largest for several years.
It also said it was relaxing the terms on which market participants could borrow Treasury securities from its own portfolio.
A New York Fed official said: “Given the high level of attention focused on the coming year end, we hope to reasssure market participants of our commitment to providing sufficient balances at that time by starting to provide these balances now.”
This week is the end of the fiscal year for several Wall Street investment banks and money market rates focused on the end of December have been rising. On Thursday, one-month Libor is expected to move sharply higher to around 4.80 per cent, after a move from 4.65 per cent since mid-November. In recent days, two-month Libor has risen to 5.06 per cent from 4.87 per cent.
In other news, the euro appreciated another .27% against the dollar today, and gold gained .22%. But inflation risks are contained. Ben Bernanke said so, and he knows more than you do about monetary policy.
Two-year Treasuries now yield 2.93%, which at today’s rate of inflation equals negative real interest. (That would be the Fed’s headline rate–3.5% … not to mention more credible, complete inflation indicators, i.e. MZM) . Who’s stupid enough to buy bonds at those rates? Good thing our equities markets are firing on all …
… nevermind.
