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  • bluecheese4u bluecheese4u Dec 12, 2007 7:57 AM Flag

    Fed considering more liquidity moves, could come soon

    Fed considering more liquidity moves, could come soon

    Reuters Wednesday December 12 2007
    (Updates with analysts views; changes dateline)

    WASHINGTON/LONDON, Dec 12 (Reuters) - The U.S. Federal Reserve is actively considering all of the tools it has available to address liquidity issues, a Fed source said, and newspapers speculated that action could come as early as Wednesday.
    The idea that the U.S. central bank might take new action to ease tensions in the money markets -- which swirled across financial markets on Wednesday -- follows Tuesday's 25 basis point cut in both the federal funds rate and the discount rate.
    The cuts disappointed investors who wanted tougher action to combat the credit crunch, and sent Wall Street stocks tumbling and depressed other equity markets.
    Some economists argue that interbank lending rates have risen so high since the end of October that they have offset official Fed rates cuts made earlier this year.
    The Financial Times web site said that an overhaul by the Fed was likely to take the shape of a new liquidity facility to auction loans to banks. The Fed could make the move on Wednesday, it said.
    This would allow the Fed to provide liquidity directly to a large number of financial institutions against a wide range of collateral without the stigma of its existing discount window loans.
    The discount window allows banks to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.
    The Wall Street Journal web site said markets were widely discussing steps the Fed could take, including another cut in the discount rate, longer-term loans to money-market dealers, and easier collateralised loans from the Fed. It said the Fed could take action within days.
    With banks highly reluctant to lend to each other on the money market, the gap between three month Treasury bill yields and the three month dollar interbank lending rate has jumped to around 220 basis points from about 50 in late July, before the credit crisis gripped global markets.
    Investment group Insinger de Beaufort noted that the Fed had outlined how an auction credit facility, as suggested by the FT, might work in a paper published in 2002.
    It said the key Fed line was that "the number of participants in auction credit facility auctions is potentially much larger than the number of primary dealers with which the desk trades in open market operations."
    Insinger predicted a sharp sell-off in Treasuries if the measure is introduced because current yields reflect safe-haven buys rather than interest rate expectations.
    Merrill Lynch, meanwhile, suggested that the Fed may have to cut interest rates again between formal meetings.
    David Rosenberg, the investment bank's North American economist, said the Fed does not fully appreciate the severity of the housing, mortgage and financial crisis.
    "By practically doing the least amount realistically possible, the Fed may well have put itself into a position where it may have to do the unthinkable and cut rates again inter-meeting," he said in a note.
    "The Fed really did little more than walk backward on the treadmill with that prior easing (earlier this year)," Rosenberg said.
    Bank of Scotland was sceptical about the power at the Fed's disposal.
    "We are not sure we believe in a magical central bank bullet -- the Fed would need to be prepared to pump out an unprecedented amount of liquidity to have a realistic chance of success," Steve Pearson, chief currency strategist, said in a note.
    A Fed source told Reuters late on Tuesday that officials at the U.S. central bank were not unaware that funding pressures had become worse and that tools to address liquidity issues remained under active consideration.

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