Fed to allow foreign central banks to swap US Tsys for cash

The Federal Reserve announced a new facility Tuesday that will allow foreign central banks to temporarily swap holdings of US Treasury debt for US dollars.

Amid the cash crunch and increased demand for dollars caused by the uncertainty around the coronavirus pandemic, the Fed's "FIMA repo facility" will allow central banks to exchange US Treasury debt for cash, rather than selling them for bargain prices.

Along with dollar swap lines the Fed already put in place for many central banks, this operation, which begins April 6, will "help support the smooth functioning of financial markets ... and thus maintain the supply of credit to US households and businesses," the Fed said in a statement.

Like the swap lines, the new facility will be in place for at least six months. It will provide overnight lending to central banks at a modest interest rate, so the cash can then go to other institutions in those countries "to help ease strains in global US dollar funding markets," the Fed said.

The global shutdown of businesses around the world has wreaked havoc on financial markets as companies rush to secure cash to remain afloat while their sales dry up.

The US central bank, under its chairman Jerome Powell, has stepped in aggressively to try to keep the financial system from seizing up, rolling out a series of measures to pump liquidity into the market.

The Fed slashed the benchmark interest rate to zero earlier this month, announced unlimited purchases of US Treasury debt and mortgage debt, massive increases in overnight lending to banks as well as lending to companies and municipalities.

Powell said the Fed will continue to lend aggressively to help the American economy weather this crisis, and he was confident the Fed can do more if needed.

© 2020 AFP