Fed steps in once again to try to smooth out lending markets

Marco Green
March 31, 2020

U.S. Federal Reserve Chairman Jerome Powell arrives to speak to reporters after the Federal Reserve cut interest rates in an emergency move created to shield the world's largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. It's aimed at supporting the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars.

The Fed's move Tuesday marks its latest aggressive effort to keep borrowing rates down and ensure that financial markets can still function in the face of the coronavirus outbreak.

The Federal Reserve on Tuesday announced the establishment of a temporary repurchase agreement facility for foreign and worldwide monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets, including the U.S. Treasury market, and thus maintain the supply of credit to U.S. households and businesses. The Fed is trying to prevent this.

The new repo facility may be especially meant to help smaller foreign central banks that don't have access to the Fed's existing dollar swap lines.

"By allowing central banks to use their securities to raise dollars quickly and efficiently, the facility will also support local markets in USA dollars and bolster broader market confidence", the Fed added. The new program will let central banks sell Treasurys to the Fed, with an agreement to buy them back the next day - a trade known as a "repurchase agreement" or repo.

President Trump, a frequent critic of Fed Chair Jerome H. Powell, has praised Powell for his recent actions, which have gone even further to help the economy, banks and markets than the central bank did during the 2008-09 financial crisis.rically low rate of 0.25 percent.

Central banks can "obtain cash instead of selling their Treasuries outright", said Gennadiy Goldberg, a strategist at TD Securities.

Five major foreign central banks have permanent swap lines with the Fed and nine additional central banks established temporary programs with the Fed on March 19. This selling pressure has, on some days, driven up Treasury yields and clogged financial markets as sellers have struggled to find buyers.

The Fed says the repo facility will be open for six months beginning April 6.

Other reports by Click Lancashire

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