> ______________________________________________ > From: Cordell, Arthur: ECOM > Sent: Tuesday, March 11, 2008 1:47 PM > To: [EMAIL PROTECTED]; > '[EMAIL PROTECTED]' > Subject: Feds print money > > Fed and central banks team up to unstick markets > By Glenn Somerville and Emily Kaiser 23 minutes ago > The U.S. Federal Reserve and other central banks on Tuesday teamed up > to get hundreds of billions of dollars in fresh funds to cash-starved > credit markets, allowing financial firms to use securities backed by > home mortgages as collateral for central bank loans. > Stocks surged, bonds fell and the long-suffering U.S. dollar rose in > reaction to the moves, a sign financial markets saw the plan as a > viable remedy to ease a crisis that has threatened world economic > growth. The Dow Jones industrials were up 1.5 percent in trading just > after midday (1600 GMT). > In the latest effort to ease a credit contraction that has disrupted > global finance, the Fed, Bank of Canada, Bank of England, European > Central Bank and Swiss National Bank announced a series of aggressive > measures to boost liquidity. It was the second time in three months > that central banks from around the globe had launched coordinated > efforts. > "In the near term, the Fed and global central banks have provided the > thing everyone needed, and that's cash," said Martin Blum, head of > emerging markets research at UniCredit in Vienna. "The actions ... > deal with this issue by making it easier for banks to get cash, and > that's important." > The Fed expanded its securities lending program, offering up to $200 > billion of highly-liquid U.S. Treasuries to primary dealers, secured > for 28 days. It also significantly expanded the types of securities > that can be used as collateral for loans. In effect, the plan allows > banks to exchange unwanted mortgage notes for easy-to-sell government > securities. > However, the U.S. central bank also said it would not accept private > mortgage-backed securities that credit ratings agencies had put under > review for possible downgrades. > That takes a bite out of the eligible debt, although the Fed said > there may be as much as $1 trillion that would qualify for the > auctions. > The Fed's moves came after some huge holders of mortgage-linked debt > received demands for more cash as the value of the securities they > held plunged. Investors, paralyzed by fears of a market shutdown, have > shunned large sectors of the debt market, causing prices to tumble and > leaving many offers for sales unfilled. > The action came on the back of an announcement from the Fed on Friday > that it would expand auctions of short-term cash to $100 billion in > March and launch a series of repurchase agreements expected to be > worth $100 billion, bringing the total of recently announced actions > to a hefty $400 billion. > SMALLER RATE CUT? > The Fed has shaved 2.25 percentage points from benchmark interest > rates since mid-September in an effort to offset the impact of the > credit tightening. Economists widely expect at least another > half-point reduction when the Fed's policy-setting committee meets > next week. > But Goldman Sachs economist Jan Hatzius said the latest steps from the > Fed make a more aggressive cut less likely. > "This announcement makes clear that Fed officials are pulling out all > the stops they can think of to deal with financial stress through the > increased provision of liquidity into the system," he wrote in a note > to clients. "To the extent they see this as substituting for rate > cuts, this should reduce the probability of a 75 basis point rate cut > next Tuesday." > As part of the latest effort, the European Central Bank said it would > auction up to $15 billion for a term of 28 days, the Swiss National > Bank said it would auction $6 billion and the Bank of Canada said it > would it provide about $4 billion. > Despite the positive market reaction, some analysts questioned whether > the latest round of central bank efforts would have much staying > power. Earlier efforts by the Fed and its counterparts were successful > in reviving markets for a short time, only to see them unravel again > when the next bout of credit turmoil emerged. > "This Fed action is good for a day or two," said Michael Cheah, senior > portfolio manager at AIG SunAmerica Asset Management in Jersey City, > New Jersey. > "There are three problems in the market. One is the price of money, > then liquidity and counterparty risk. The Fed can do all it can in the > first two areas by trying to reduce (interest rates) and the price of > money. However, these moves are not going to mitigate the counterparty > risk," he said. > Banks have essentially lost faith in each other after seven months of > market unrest, making them reluctant to lend money to one another and > driving up borrowing costs for the consumers and companies that power > the world economy. > The Fed said its new lending facility will operate through weekly > auctions that will start on March 27. It also said it was increasing > existing currency swap lines with the ECB and SNB, allowing those two > central banks to offer more U.S. dollars in their respective markets. > (Additional reporting by Al Yoon in New York; writing by Emily Kaiser; > editing by Gary Crosse) >
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