Fed Throws in $620 Billion In Swaps For Dollar Liquidity

It appears that a US-led bailout package may only be part of an effort to calm market fears.  The Federal Reserve has announced a massive coordinated liquidity package to provide U.S. dollar liquidity.  The Federal Reserve announced today several initiatives to support financial stability and to maintain a stable flow of credit to the economy during this period of significant strain in global markets.  It says it will continue to adapt these liquidity facilities as necessary and, more importantly, will keep them in place as long as circumstances require.

The Fed is increasing the size of the 84-day maturity Term AuctionFacility (TAF) auctions to $75 billion per auction from $25 billion.It will have two forward TAF auctions totaling $150 billion inNovember. It is also increasing swap authorization limits with the Bankof Canada, Bank of England, Bank of Japan, National Bank of Denmark,European Central Bank, Bank of Norway, Reserve Bank of Australia, Bankof Sweden, and Swiss National Bank.  This takes the total swapauthorization up to a total of $620 billion, far above the $290 billionpreviously authorized.   

The Federal Reserve wants to reassure financial markets that financingwill be available against good collateral, lessening concerns aboutfunding and rollover risk.   

The TAF 84-day maturity credit will now be $225 billion from $75billion, and TAF credit at the 28-day maturity will remain at $75billion.  The total amount of TAF credit available in the 28-day and84-day auction cycles will double to $300 billion from $150 billion.It is anticipated that there will be two auctions in November with atotal $150 billion.

The FOMC is also acting to expand foreign exchange swap lines with anauthorized $330 billion expansion of its temporary swap lines toprovide funding for U.S. dollar liquidity operations by the othercentral banks.  The FOMC has authorized increases in all of thetemporary swap facilities with other central banks to come to $620billion through April 30, 2009 as follows:

• up to $30 billion by the Bank of Canada,
• $80 billion by the Bank of England,
• $120 billion by the Bank of Japan,
• $15 billion by Denmark’s National Bank,
• $240 billion by the ECB,
• $15 billion by the Bank of Norway,
• $30 billion by the Reserve Bank of Australia,
• $30 billion by the Bank of Sweden,
• and $60 billion by the Swiss National Bank.

This is exactly what you would call a coordinated global stabilizationeffort.  If you take this to an extreme, it would seem that there are no longer any chances of country economics beingisolated events.

Jon C. Ogg
September 29, 2008