Fed Starts Repo Facility to Provide Dollars to Central Banks
(Bloomberg) -- The Federal Reserve, in its latest response to strains caused by the coronavirus pandemic, has opened a temporary repurchase agreement facility for foreign central banks to support the smooth functioning of financial markets.
The program will allow participants to temporarily exchange U.S. Treasuries for dollars, which can then be made available to institutions in their jurisdictions, the Fed said in a statement Tuesday.
The program, available April 6, is a new weapon in the Fed’s arsenal to stabilize dollar funding markets as the U.S. and other major economies enter a virus-induced partial shutdown. It’s aimed at supporting the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars.
“What we often see in a crisis is that there is a shortage of dollars globally,” Julia Coronado, founding partner of MacroPolicy Perspectives in New York, said in an interview on Bloomberg Radio. “This is what the Fed is trying to address. It’s trying to short circuit what is clearly going to be deep and painful recession from becoming a full-blown financial crisis.”
The dollar pared its gains after the announcement, while short-end Treasury yields held steady and U.S. stock futures remained down on the day.
Read More: Dollar Strains Ease Before Fed’s Repo Lifeline
The facility “reduces the need for central banks to sell their Treasury securities outright and into illiquid markets,” helping stabilize trading in the world’s most secure and important asset, the Fed said.
The new repo facility may be especially intended to help smaller foreign central banks that don’t have access to the Fed’s existing dollar swap lines. Foreign entities hold about $6.86 trillion of Treasuries, Fed data show.
Five major foreign central banks have permanent swap lines with the Fed and nine additional central banks established temporary programs with the Fed on March 19.
“By allowing central banks to use their securities to raise dollars quickly and efficiently, the facility will also support local markets in U.S. dollars and bolster broader market confidence,” the Fed added. “Stabilizing foreign dollar markets, in turn, will support foreign economic conditions and thereby benefit the U.S. economy through many channels, including confidence and trade.”
The facility was authorized by the Federal Open Market Committee, according to the statement.
The Fed said the term of the repos will be overnight, but can be rolled over as needed. Transactions will be conducted at a rate of 25 basis points over the interest rate on excess reserves, which is currently set at 0.1%.
Outstanding transaction totals will be made public in the Fed’s weekly balance sheet report.
Central banks can “obtain cash instead of selling their Treasuries outright,” said Gennadiy Goldberg, a strategist at TD Securities. “This should 1) take some pressure off dealer balance sheets and 2) prevent foreign central banks from selling their Treasuries in large sizes, which can destabilize the market.”
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