Fed Takes New Action To Provide Support To Lending Markets

FILE - In this March 3, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. The Federal Reserve says it will buy short-term loans from banks and companies to support t... FILE - In this March 3, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. The Federal Reserve says it will buy short-term loans from banks and companies to support the flow of credit as the economy grinds to a halt amid the viral outbreak. The Fed is reviving a program that it first used during the 2008 financial crisis to unclog a short-term lending market for what is known as “commercial paper.” (AP Photo/Jacquelyn Martin, File) MORE LESS
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March 31, 2020 9:54 a.m.
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WASHINGTON (AP) — The Federal Reserve is intervening once again to try to smooth out the world’s lending markets, this time by lending dollars to other central banks in exchange for Treasurys.

The Fed’s move Tuesday marks its latest aggressive effort to keep borrowing rates down and ensure that financial markets can still function in the face of the coronavirus outbreak. The virus has caused a near-shutdown of economic activity in the United States and abroad and made it harder for some banks and companies to borrow. The Fed is trying to facilitate lending and boost confidence that it will do all it can to support the global financial system.

The new lending program will allow other central banks to access dollars without having to sell Treasury securities. Excessive selling of Treasurys typically causes their interest rates, or yields, to rise, and that makes borrowing more expensive. The Fed is trying to prevent this.

“This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market,” it said in a statement.

Foreign central banks typically lend dollars to banks in their countries, which conduct much of their business in dollars.

The Fed has already expanded dollar “swap lines” with 14 central banks to exchange dollars for an equal amount of foreign currency. The new program will let central banks sell Treasurys to the Fed, with an agreement to buy them back the next day — a trade known as a “repurchase agreement” or repo. The central banks pay a small interest rate on what is essentially an overnight loan, which can be repeated.

As the coronavirus has disrupted economies and financial markets, banks and other financial institutions have sought to sell Treasurys and other securities to raise cash. This selling pressure has, on some days, driven up Treasury yields and clogged financial markets as sellers have struggled to find buyers. The Fed’s overseas lending program will enable foreign central banks to convert Treasuries to cash without having to sell them.

The program will start April 6 and continue for at least six months, the Fed said.

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