Fed's Recent Moves to Add Liquidity

The U.S. Federal Reserve on Wednesday announced with other major central banks measures to alleviate upward pressure in interbank markets as financial sector troubles have made it more difficult for banks to raise funds.

Following are some major steps the Fed has taken to provide funding to the banking system:

Dec. 12: The Fed established a temporary auction facility to provide funds over a longer-term period to all depository institutions that are able to borrow under the discount window.

Collateral will be the same as used to secure loans at the discount window. The Fed has arranged four auctions, the first on Dec. 17 where the Fed will offer $20 billion over a 28-day period.

The minimum bid rate for the auctions will be the overnight indexed swap (OIS) rate, a measure of market participants' expected average federal funds rate over the relevant term. Noncompetitive tenders may be accepted beginning with the third auction.

The Fed also established foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The arrangements will provide dollars in amounts of up to $20 billion for the ECB and $4 billion for the SNB. The swap lines will exist for up to six months.

Nov. 26: The New York Federal Reserve Bank said it would conduct a series of term repurchase agreements extending into the new year to alleviate year-end funding pressures.

It said it would also provide sufficient reserves to stem upward pressure on the federal funds rate.

Aug. 17: The Fed cut the discount rate by 50 basis points to 3.75 percent, narrowing the spread between that and the federal funds rate to just 50 basis points from its previous 100 basis points. It also announced a change to allow borrowing at the discount window for up to 30 days, renewable by the borrower.

Aug. 10: In an unusual statement, The Fed said banks were experiencing unusual funding needs because of dislocations in money and credit markets and would provide funds as needed. It also said the discount window was available as a source of funding.

The Fed's open market desk provided $38 billion via temporary repurchase agreements that day, flooding the markets with liquidity that brought the federal funds rate to zero at one point.