NEW YORK (Reuters) - The Federal Reserve on Monday took steps meant to assure the ready supply of money for lending to banks through the end of the year in response to a ongoing pressure in money markets.
By Chris Reese
NEW YORK (Reuters) - The Federal Reserve on Monday took steps meant to assure the ready supply of money for lending to banks through the end of the year in response to a ongoing pressure in money markets.
The Fed's announcement follows a surprise announcement from the European Central Bank on Friday saying it will continue offering banks additional funds at least until the end of the year to counter rising money market interest rates.
The Fed said it will provide more than the usual year-end liquidity and that it is lifting the limits on how much can be lent to any one bank.
!ADVERTISEMENT!The Fed said it would offer on November 28 about $8 billion through a repurchase agreement due to mature on January 10, 2008, and that it would conduct more term repurchase agreements extending into the new year.
A term repurchase agreement is a Fed loan to banks of more than one trading day.
London interbank offered rates for two-month euro deposits climbed to new six-and-a-half-year highs on Monday and three-month euro rates rose for the ninth straight session with persistent concerns over banks' year-end funding.
The Fed said the timing and the amounts of the subsequent term operations spanning the year end will be influenced by market and reserve developments.
The Fed also said its open market trading desk plans would provide sufficient reserves to resist upward pressures on the federal funds rate above the Federal Open Market Committee's target rate around year end.
The federal funds rate, which is the rate at which banks lend overnight to each other, stood on Monday at 4.625 percent, above the 4.5 percent target rate set by the Fed on October 31.
"Given the high level of attention focused on the coming year end, we hope to reassure market participants of our commitment to providing sufficient balances at that time by starting to provide those balances now," said a New York Fed official who did not wish to be named.
The Fed last undertook such a year-end operation on December 8, 2005, when it did a 28-day repurchase worth $5 billion. The Fed also undertook a 52-day repurchase agreement worth $4 billion on November 15, 2004.
"Obviously liquidity has been an issue, but it is not too surprising -- they are just trying to advertise the fact that they are at the ready," said Beth Malloy, bond market analyst with Briefing.com in Chicago.
BORROWING LIMITS RAISED
The Fed also said on Monday it was raising the primary dealer borrowing limits from its open market trading desk, effective immediately.
Primary dealers will be limited to 25 percent of the amount available for borrowing with a maximum of $750 million per issue, versus the prior limit of 20 percent with a maximum of $500 million per issue, the Fed said in a statement.
In terms of portfolio limits, the supply available for borrowing each day was increased to 90 percent of an individual issue from 65 percent, while all securities with maturities of greater than six days will be available for borrowing versus the previous limit of securities maturing in greater than 13 days, the Fed said.
(Editing by Walker Simon)
