Fed extends emergency funding programs, swap lines
NEW YORK (Reuters) - The Federal Reserve on Thursday extended by three months a number of emergency funding facilities and a foreign exchange program with central banks around the world designed to support lending, saying that some financial markets remain impaired and seem "likely to be strained for some time."
The U.S. central bank had established a number of programs last year to extend lifelines to credit markets frozen in fear of large losses as a result of the financial crisis. The programs, which had been scheduled to expire at the end of October, were extended to February 1, 2010.
The Fed on Thursday said, however, that it has begun to see improvement in financial markets, and that the emergency funding facilities have begun to see less demand. The Fed said it is scaling back some emergency programs and not extending a program for money markets.
The announcement comes a day after the Federal Reserve left interest rates unchanged at virtually zero and said it saw signs that the deep U.S. recession was easing.
Senior Fed officials, on a background call with reporters, avoided answering a question whether their actions could be characterized as the beginning of an "exit strategy" from the Fed's hefty involvement in supporting financial markets.
Fed representatives said only that the actions reflected the U.S. central bank's expectations of how the economy and financial markets were likely to evolve in coming months.
People have been questioning how the Fed would reverse course once the economy is back on solid footing. Any exit strategy, however, would require a delicate balance: removing extra liquidity too soon could squash a recovery; moving too slowly could spawn inflation.
The Fed's Board of Governors approved extension of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF).
The Fed also extended the temporary reciprocal currency arrangements, known as swap lines, between the Federal Reserve and other central banks to February 1.
A senior Federal Reserve official said use of the swap lines with 14 other central banks around the world had peaked last December at around $586 billion and had fallen to under $150 billion currently.
The Money Market Investor Funding Facility (MMIFF) for money market funds will not be extended beyond October, due to better market conditions and the continued availability of other programs.
The central bank cut the size of upcoming Term Auction Facility (TAF) auctions, and said that auctions under the Term Securities Lending Facility's Schedule 1 auction and TSLF Options Program auctions will be suspended due to weak demand.
TSLF auctions backed by Schedule 2 collateral will now happen every four weeks rather than ever two weeks and the total amount auctioned under TSLF is being reduced to $75 billion.
Schedule 1 includes all collateral eligible for tri-party repurchase agreements. Schedule 2 also includes investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities.
The TAF auction is being reduced from $150 billion to $125 billion, effective July 13. If market conditions continue to improve, the TAF funding "will be reduced gradually further." Continued...
