Fed leads move to ease credit strains

By Krishna Guha in Washington and Michael Mackenzie in New York

US and European central banks on Friday launched a fresh co-ordinated assault on dollar money market strains on both sides of the Atlantic.

The Federal Reserve announced that it was increasing the size of its credit auction facility – the Term Auction Facility, which offers one-month loans to banks – by 50 per cent to $150bn.

Meanwhile the Fed, the European Central Bank and the Swiss National Bank said they were increasing the size of dollar currency swaps by almost 50 per cent to $50bn and $20bn, respectively.

This money will be used to increase the supply of dollars offshore in Europe.

Both moves are designed to target the high spreads in the interbank money market, which have not eased in recent weeks in spite of the progress in some other credit markets.

The Fed believes that many of the strains in the dollar money markets reflect pressure from European banks that are structurally short of dollars.

The US central bank also slightly widened the pool of securities eligible to be swapped into Treasuries through its securities lending programme to include triple A-rated asset-backed securities. It already accepted US Treasury and agency securities and agency mortgage-backed securities.

”The wider pool of collateral should promote improved financing conditions in a broader range of financial markets,” the central bank said.

Analysts said the Federal Reserve’s increase in the TAF and larger swap lines with other central banks suggest they now believe this is the best way to tackle stubbornly high interbank rates.

”After throwing everything and the kitchen sink against this financial crisis, the Fed has found what works best and is building on it,” said TJ Marta, fixed income strategist at RBC Capital Markets.

”It provides more impetus for markets to shift their focus from the financial market crisis to the real economy downturn.”