Fed and global central banks move to boost dollar funding
The Federal Reserve and five other central banks announced coordinated action on Sunday to boost liquidity in dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.
Central banks involved in the dollar swaps will “increase the frequency of seven-day maturity operations from weekly to daily,” the Fed said in a statement coordinated with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.
The announcement came ahead of the opening of financial markets in Asia, a move likely timed to show swift action and stem jitters among global investors at the start of the week.
US and European equity futures held small gains, the dollar fluctuated and Treasuries fell in Asia Monday as investors weighed the weekend efforts to safeguard the global banking system. Earlier on Sunday, UBS Group AG agreed to buy Credit Suisse Group AG in a government-brokered deal.
The US central bank has typically provided access to such arrangements at times when there’s a squeeze on the availability of dollars. That can arise because banks outside the US typically have obligations that are denominated in greenbacks, and in times of financial strain have less access to dollar funding.
The liquidity injection is “very much needed” especially for the Swiss and European central banks right now, said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “We learned that the hard way during the global financial crisis in 2008 when it took too long to set them up. The Fed was much faster in March 2020 and this time around.”
The move comes amid heightened tension that began with the collapse of three US lenders about a week ago.
The boost to swap lines will “enhance the provision of liquidity,” the central banks said, describing the arrangements as “an important liquidity backstop to ease strains in global funding markets” and mitigate the impact on the supply of loans to households and businesses.
The Fed said daily operations will begin on Monday, March 20 and will continue at least through the end of April. The BOJ released on Monday a schedule for the daily release of operation results through to April 28, with less frequent disclosure to follow in May and June.
“Central banks and authorities were right to take swift action before Asian markets opened,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp. “Still, those actions alone can’t erase every concern from markets. A big key event is obviously the Fed meeting this week. Market players will be watching how current destabilised financial markets will affect the pace of rate hikes.”
The swap-lines arrangement has analysts split on what impact it’ll have on that looming Fed decision to be announced on Wednesday from Washington.
Former Fed governor Larry Meyer is among those saying that it could make a rate hike less likely as it suggests “greater worry about the left-tail risk from financial contagion.” Analysts at Monetary Policy Analytics, the firm he chairs, at the same time acknowledged that the ECB’s hike last week might give the Fed some room also to “separate financial easing from monetary tightening”.
That more hawkish impact is the view of Vanessa Chan, head of Asian fixed-income investment directing at Fidelity International.
“Interest-rate hikes are probably likely to continue while they start to put in various liquidity instruments or liquidity buffers so it helps to stabilise the sort of liquidity situation that we’re facing in the market,” Chan said on Bloomberg Radio on Monday morning.
In a joint statement earlier on Sunday, the Fed and the US Treasury joined other central banks in welcoming the Credit Suisse rescue. Treasury secretary Janet Yellen and Fed chair Jerome Powell stressed that the capital and liquidity of US banks is strong.
Last week, banks rushed to borrow cash from the Fed as they sought to shore up liquidity amid concern about a flight of deposits. Lenders borrowed some $165 billion in total under two backstop facilities. Altogether, the emergency lending reversed several months’ worth of the Fed’s campaign to shrink its balance sheet. BM/DM