FED FOCUS-Fed may be pressed for more liquidity steps
August 29th, 2008 | by admin |By Tamawa Kadoya
NEW YORK, Aug 28 (Reuters) - The U.S. Federal Reserve maybe pressed in coming months to provide further liquidity tostrained money markets as the financial system remainsvulnerable despite rapid monetary easing over the past year.
But the Fed would like to stay within the parameters of theliquidity programs that were put in place after a credit crunchsurfaced last August rather than take radical new steps.
“We will continue to review all of our liquidity facilitiesto determine if they are having their intended effects orrequire modification,” Fed Chairman Ben Bernanke told theKansas City Federal Reserve Bank’s annual conference in JacksonHole, Wyoming last Friday.
The U.S. central bank last month took steps to offset thepossibility of liquidity crunches at quarter-ends and theyear-end, when fund demand is customarily high. (For more onthe Fed’s liquidity tools see [ID:nN28320255]; for a chronologyon steps the Fed has taken see [ID:nN28319669])
On Wednesday, the New York Fed conducted its first auctionof awarding options where primary dealers can borrow U.S.Treasuries for less liquid assets, one of the new stepsannounced in July. The auction of the Term Securities LendingFacility Options Program (TOP) drew fairly good demand with abid-to-cover ratio of 2.04.
“The Fed doesn’t have a lot of cards left to play on theliquidity front, and needs to save its remaining balance sheetadjustments for the times when they will do the most good,”said Louis Crandall, chief economist at Wrightson ICAP inJersey City, New Jersey.
The Fed holds a little more than $300 billion in Treasurysecurities outright on its balance sheet, compared with some$800 billion before the credit crisis last fall.
Crandall said the Fed could use a similar tactic to the TOPfor the Fed’s Term Auction Facility, a program set up inDecember where banks can raise funds directly from the centralbank via auction.
