Will foreign central banks join the Fed with significant monetary expansion?
*Bloomberg, by John Fraher & Simon Kennedy, September 18, 2008:
"The Federal Reserve almost quadrupled the amount of dollars central
banks can auction around the world to $247 billion in a coordinated bid
to ease the worst crisis facing financial markets since the 1920s.
The Fed increased the amount of dollars that the European Central Bank,
the Bank of Japan and other counterparts can offer from $67 billion 'to
address the continued elevated pressures in U.S. dollar short-term
funding markets.' The Bank of England, the Bank of Canada and the
Swiss National Bank also participated.
Policy makers have struggled to revive confidence in markets this week
as investors stockpiled money on concern more financial institutions
would fail after the bankruptcy of Lehman Brothers Holdings Inc. and
the U.S. government bailout of American International Group Inc. The
cost to hedge against losses on U.S. government debt climbed to a
record yesterday.
'There's a complete lack of faith in the markets,' said Jim O'Neill,
chief economist at Goldman Sachs Group Inc. in London. 'There's a lot
of cash hoarding and people losing trust in banks, so the central banks
are acting to relieve that. This might not be the last time they have
to act.'
Markets welcomed the announcement, which was made in statements from
each central bank at 9 a.m. Frankfurt time at the start of European
trading. The cost of borrowing dollars overnight slid to 3.84 percent
from 5.03 percent yesterday. It was 2.15 percent last week and reached
the highest since 2001 on Sept. 15.
Limit Doubled
The Fed, which is adding $50 billion into its own banking system today,
will spray dollars around the world via swap lines with other central
banks. They can then auction them in their own markets. The ECB, Bank
of England and Swiss National Bank allotted a total of $64 billion for
one day today.
'The timing, so early in the trading day, shows both the severity of
the strains in the interbank market and as well the authorities'
determination to resuscitate orderly functioning of the money markets,'
said Julian Callow, head of European economics at Barclays Capital in
London.
Under the new arrangements, the ECB doubled the limit of dollars it can
get from the Fed to $110 billion and Switzerland's central bank can
offer $27 billion, an extra $15 billion. New swap facilities with the
Bank of Japan, the Bank of England and the Bank of Canada amount to $60
billion, $40 billion and $10 billion, respectively. The arrangements
are authorized until Jan. 30.
Use as Necessary
The ECB said it would offer $40 billion 'for as long as needed' in
overnight funds to the region's banks. It will also increase by $5
billion the amount it lends for 28 days and 84 days to $25 billion and
$15 billion. The Swiss National Bank will boost its 28-day auctions to
$8 billion and the 84-day offering to $9 billion. Both were previously
$6 billion.
The Bank of Canada said it has decided not to draw on its $10 billion
swap facility at this time. The Bank of Japan, whose policy board held
an emergency meeting today, said it will use its $60 billion as
required by market conditions.
In auctions of their own currencies, the ECB today lent 25 billion
euros in one-day money and the Bank of England 66.2 billion pounds in
one-week loans.
The joint action is the latest attempt by central bankers to avert the
financial crisis which deepened this week after Lehman and AIG tumbled
and Merrill Lynch & Co. was sold. The crisis began over a year ago
after the U.S. housing market imploded and has pushed the world economy
to the brink of recession."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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