Fed launches new loan facility for foreign central banks
WASHINGTON — The Federal Reserve said on Tuesday it would launch a temporary lending facility that will allow foreign central banks to convert their holdings of treasury securities into dollars for the first time, its latest offer to alleviate tensions in world markets.
The program is designed to alleviate tensions in foreign exchange markets this had prompted more foreign central banks to sell their holdings of treasury bills. The Fed has aggressively bought treasury and mortgage securities to reduce market tensions, and the latest move could reduce the supply of these securities in the market if foreign central banks can more easily swap them for dollars.
The program could allow about 170 foreign central banks and other international monetary authorities that hold accounts at the New York Fed and are not subject to U.S. sanctions to enter into a loan deal called a repo agreement, or repo, in which borrowers temporarily exchange their treasury. securities for dollars.
“This facility should help support the smooth functioning of the US Treasury market by providing a temporary alternative source of US dollars other than open market sales of securities,” the Fed said in a statement.
The repo facility for foreign central banks will be available from April 6 for at least six months.
The latest dollar lending programs will complement the separate tools the Fed has launched to lend dollars to 14 other central banks in Europe, Canada, Mexico, Japan, Brazil and Australia to ensure markets do not. there is no shortage of foreign currency outside the United States.
Many foreign business transactions are done in dollars, and foreign institutions also lend in the currency. The Fed used these “swap” lines aggressively in 2008 and 2009 during the financial crisis.
But the latest lending program goes beyond what the Fed employed during the financial or eurozone crisis of 2011-12 by making dollar funds available to a much larger cohort of reserve banks. emerging markets. It highlights the growing primacy of the dollar in global finance and the demands placed on the Fed to serve as the world’s central bank.
The new lending facility is likely to reach a much broader set of foreign central banks, especially those with high dollar requirements and lacking Fed swap lines, notably in India, China and in Saudi Arabia.
While swap lines essentially allow the Fed to lend against foreign central bank currencies, the latest repo operations offer these central banks loans against their holdings of US Treasuries.
The latest facility is expected to “play a useful role in helping small emerging markets that need to monetize dollar assets to combat excessive exchange rate depreciation,” Evercore ISI analysts said in a report Tuesday.
Write to Nick Timiraos at [email protected]
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