Last week the Fed took various steps to inject dollars/liquidity into the global markets, here is a look at their plans to increase the magnitude of those efforts:
(From Bloomberg): "The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.
``The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are ``consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.
Today's steps follow a hoarding of cash by banks that sent the premium on the three-month London interbank offered rate over the Fed's benchmark interest rate to a record. Industrial companies are also finding it harder to raise cash after the market for commercial paper shrank to a three-year low as investors flee even borrowers with few links to mortgages.
``It is pretty much all out war,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., New York. ``They are pulling out all the stops to try and get borrowers and lenders to meet and do transactions once again.''
Implementing part of last week's emergency legislation to shore up the financial industry, the Fed said today it will begin paying interest on the cash reserves banks hold at the central bank. The step should give Fed officials greater power to inject cash into banks without interfering with their benchmark interest rate, which stands at 2 percent.
Bernanke Speech
Fed Chairman Ben S. Bernanke's speech on the economic outlook tomorrow in Washington should give an indication of whether U.S. central bankers are prepared to cut the main rate before the next meeting Oct. 28-29, Rupkey said.
As part of today's steps, the Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, the Fed said.
Money market rates are climbing worldwide on concern the deepening credit crisis will cause more financial firms to collapse. Three-month Libor climbed to 4.29 percent today, the biggest premium over the Fed's benchmark since the central bank began using a target for the overnight federal funds rate between banks as its main tool around 1990."
The Fed is flooding the global markets with dollars and yet LIBOR continues to increase and the credit crunch continues to get worse, which begs the question: how many dollars are needed, what happens when all of those dollars flow back into the global economy and what will be the long-term effects of the Fed deflating our currency into monopoly money?
I understand the need for drastic measures for drastic problems and I'm not necessarily disputing the need for the Fed's recent actions, I'm just asking the question: will this cure turn out to be worse than the disease?
You can read the article in full here(Bloomberg), and the Press Release from the Fed that also discusses changes brought about by the signing of TARP here.
Sources:
Bloomberg: "Fed Boosts Cash Auctions to $900 Billion, May Do More" -- Scott Lanman, Craig Torres, October 6, 2008.
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.
