PrefBlog

The Fed has announced:

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

Wow. They’re flooding the market with cash.

Update: Across the Curve comments that credit spreads are tighter and TIPS breakeven is wider.

Update, 2009-3-19: Commentary from Econbrowser

Update, 2009-4-3: Bernanke has given a speech titled The Federal Reserve’s Balance Sheet, in which he makes the point:

the provision of liquidity on a collateralized basis to sound financial institutions is a traditional central bank function. This so-called lender-of-last-resort activity is particularly useful during a financial crisis, as it reduces the need for fire sales of assets and reassures financial institutions and their counterparties that those institutions will have access to liquidity as needed. To be sure, the provision of liquidity alone cannot address solvency problems or erase the large losses that financial institutions have suffered during this crisis. Yet both our internal analysis and market reports suggest that the Fed’s ample supply of liquidity, along with liquidity provided by other major central banks, has significantly reduced funding pressures for financial institutions, helped to reduce rates in bank funding markets, and increased overall financial stability. For example, despite ongoing financial stresses, funding pressures around year-end 2008 and the most recent quarter-end appear to have moderated significantly.

With respect to Maiden Lane, et al., he states:

These extensions of credit are very different than the other liquidity programs discussed previously and were put in place to avoid major disruptions in financial markets. From a credit perspective, these support facilities carry more risk than traditional central bank liquidity support, but we nevertheless expect to be fully repaid. Credit extended under these programs has varied but recently has accounted for only about 5 percent of our balance sheet. That said, these operations have been extremely uncomfortable for the Federal Reserve to undertake and were carried out only because no reasonable alternative was available. As noted in the joint Federal Reserve-Treasury statement I mentioned earlier, we are working with the Administration and the Congress to develop a formal resolution regime for systemically critical nonbank financial institutions, analogous to one already in place for banks. Such a regime should spell out as precisely as possible the role that the Congress expects the Federal Reserve to play in such resolutions.

This entry was posted on Wednesday, March 18th, 2009 at 2:27 pm and is filed under Banking Crisis 2008. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.