FED increases market liquidity with $20 billion cash injection
Written by admin on December 13th, 2007 in Trading, US economy.
Toady on the 13th December 2007 a joint plan has welcomed by global financial markets that involves a $20 billion cash injection from a consortium of five world central banks to stave of the growing likelihood of US recession and ease the credit crunch in other financial markets.
The cash injection will be made available in the form of ten of billions of dollars of short terms loans to banks, aimed at lowering inter-bank lending rates. The program called a “term-auction facility” will be available alongside additional expanded lending facilities available from the Canadian and European Central Banks.
The move was welcomed by Banks who reacted negatively to what they called a timid quarter point cut on Tuesday 11th December. On news of the new lending schemes being released U.S. stocks began to show signs of recovery, after late drops on Tuesday following the cut by the FED.
“News that global central banks are pledging liquidity was a positive for the market early in the trading day, but, upon further reflection, some might be pondering if it’s really a solution, or further evidence of just how deeply embedded the problems in the financial system have become,” said Frederic Ruffy, analyst at Optionetics.
News of co-ordinated action with Europe’s top banks demonstrates that the FED is taking additional steps, after lowering the federal funds rate on Tuesday did not accomplish enough in terms of unclogging credit markets.
The main problem in credit markets has not been that rates were too high, but that financial institutions have been unwilling to lend after subprime mortgages and other securities had been badly mispriced. The added liquidity that the “term-auction facility” should provide should relieve some of that pressure on financial institutions.
Through this action the Fed is actively forcing liquidity into financial markets, rather than having banks demand it. This extra liquidity will be supplied at whatever price the market deems, rather than setting an interest rate first and letting the amount of the loans be determined by demand from banks.
As part of the plans there are also procedures in place to protect any bank accesses the funds, and so will remain anonymous. The aim here is avoiding any stigma a bank may receive regarding mis-managed liquidity property.
