[DEBATE] : Fed promises infinite money as long as banks want it
Riaz K Tayob
riazt at iafrica.com
Sat Dec 22 08:17:55 GMT 2007
Fed promises infinite money as long as banks want it
Submitted by cpowell on 11:39AM ET Friday, December 21, 2007. Section:
Fed to Offer Special Auctions 'As Long As Necessary'
By Liz Capo McCormick Bloomberg News Service Friday, December 21, 2007
NEW YORK -- The Federal Reserve will conduct biweekly emergency auctions
of loans as "long as necessary" as part of a global attempt by central
bankers to restore faith in the money markets.
The Fed and European Central Bank loaned $30 billion in 35-day funds
today at an interest rate of 4.67 percent, 2 basis points more than the
initial special auctions four days ago. The rates are less than the 4.75
percent banks are charged to borrow directly at the Fed's discount
window, suggesting the central bank is making progress in alleviating
the credit crunch.
"The Fed finally gets it," said Andrew Brenner, co-head of structured
products in New York at MF Global Ltd. "This allows the Fed to postpone
easing, which they prefer due to inflation."
The U.S. central bank had scheduled four special auctions, with the
final two slated for Jan. 14 and Jan. 18. The central banks, along with
those in Canada, Switzerland and the U.K., announced plans on Dec. 12 to
move in concert to alleviate the credit squeeze threatening global
growth, in the biggest act of international economic cooperation since
the Sept. 11 terrorist attacks.
Policy makers have cut the Fed's target rate for overnight loans between
banks by 100 basis points to 4.25 percent since September, and the
discount rate by 150 basis points. The U.S. central bank has also
provided $8 billion in long-term repurchase agreements through year-end
and let $35.2 billion in short-term securities mature so the proceeds
could be used to provide liquidity in the banking system.
...TED Spread Narrows
"The fact that the Fed said they will continue every two weeks with
these auctions will help yields on Treasuries to move higher, spreads to
come in, and stocks" to rise, said Richard Gilhooly, an interest-rate
strategist in New York at BNP Paribas Securities Corp., one of the 20
primary dealers that trade directly with the central bank.
Benchmark 10-year note yields rose 8 basis points to 4.13 percent, the
biggest increase in a week. Yields on three-month bills, seen as a haven
from turmoil by investors, increased 4 basis points to 2.97 percent. The
Dow Jones Industrial Average gained 1.2 percent to 13,406.84, while the
Standard & Poor's 500 Index increased 1.13 percent to 1,477.42.
The difference between three-month Treasury bills and the three-month
London Interbank Offered Rate, known as the TED spread, narrowed 7 basis
points to 1.89 percentage point. That's down from a four-month high of
2.21 percentage points Dec. 11.
Financial institutions submitted $57.66 billion in bids to the Fed at
their $20 billion auction of 35-day funds, resulting in a bid-to-cover
ratio of 2.88, lower than the prior auction. There were 73 bidders,
compared with 93 banks and securities firms earlier, the central bank
said in a statement today.
"The rate wasn't so high that it should cause concern about any dire
need for liquidity," said Michael Pond, an interest-rate strategist in
New York at Barclays Capital Inc., another primary dealer. "People were
looking for funds and liquidity on a competitive basis."
All the funds were made available at the stop-out rate, or the lowest
rate that the Fed accepted at the auction. Bids at the stop-out rate
were prorated at 73.40 percent, compared with 1.96 percent at the $20
billion auction of 28-day funds.
The minimum accepted bid rate set by the Fed for today's auction was
4.15 percent, a rate based on a measure, known as the overnight indexed
swap rate, of the average overnight fed funds rate over the term of the
credit being auctioned.
Overnight indexed swaps are derivatives in which one person agrees to
pay a fixed rate in exchange for receiving the average of a floating
central bank rate over the life of the swap. For such swaps based in
U.S. dollars, the floating rate is the daily effective federal funds rate.
"It's a sign the Fed is being nimble in terms of managing reserves and
these temporary liquidity problems," said Kenneth Kim, an economist at
Stone & McCarthy Research Associates in Skillman, New Jersey. "I don't
think they will have to do much more but it's a good sign."
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