Central Banks in Panic Mode, Fed to Auction up to $200 Billion

The US dollar skyrocketed this morning after the Federal Reserve announced auctions to lend as much as $200 billion in US Treasuries. This is a coordinated operation in conjunction with the European Central Bank, the Swiss National Bank and the Bank of England. According to the statement published on the website of all 4 central banks,

“Since the co-ordinated actions taken in December, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in the funding markets,”

“We all continue to work together and will take appropriate steps to address these liquidity pressures.”

The Fed has increased its swap lines with the ECB and SNB. The Bank of England also announced that it is extending its 3 month loan program. The Fed is now willing to accept a wider range of collateral including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. These loans will be available for 28-days which make them more generous than the overnight loans offered under the current program.

Today’s announcement comes minutes after the trade balance report indicates that the Fed is in panic mode. Their prior actions have only lasted for a few days at best and with each announcement, they are stepping up the ante. Unfortunately as much as they try, banks are still reluctant to lend money, which will hinder their efforts.

I consider this another form of coordinated intervention.

Expect the dollar to continue to benefit from this announcement, but the rebound may not last because this action allows Bernanke to substitute a 50bp rate cut for a 75bp cut next week.

Stocks are up, today should be a good day – or at least the Fed hopes so.


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