Fed Will Not Buy European Sovereign Debt

William Dudley, President of the Federal Reserve Bank of New York, told a US House of Representatives subcommittee today that the Fed will not be buying European sovereign debt. At the same time, he defended the Fed policy announced last week of extending currency swaps to foreign central banks.

According to Bloomberg News, Dudley said, “We have never gone out and bought large portions of sovereign debt in the history of the Fed that I’m aware of.” He also said that the debt crisis in Europe is “their problem to solve,” but that the Fed is “ prepared to boost liquidity to U.S. banks if necessary.”

Currency swaps in the week since the announcement exploded by $52 billion this week, to a total of $54.3 billion. The currency swaps allow foreign central banks to borrow dollars and then allow local commercial banks to purchase dollars at auction while giving the Fed foreign currency (euros in this case) as collateral.

Dudley said that it is critical to the US for foreign banks to have the ability to finance their US dollar-denominated assets. The availability of US dollars to foreign commercial banks helps those banks protect themselves against liquidity shortages.