Central Banks Will Provide Unlimited Liquidity

Early this morning, in an unprecedented effort to re-start the interbank lending markets, the Federal Reserve in conjunction with the BoE, ECB, SNB and BoJ announced an extraordinary, unlimited liquidity boost which will provide banks with "any amount they wish."

The ECB, BoE and SNB will lend dollars against appropriate collateral for 1 week, 1 month and 3 month terms at a fixed interest rate which has not been announced as of yet. In order to make dollars available to the other central banks, the Fed will increase its swap arraignments in order to "accommodate whatever quantity of U.S. dollar funding is demanded."

The decision, announced at 02:00 EDT, helped lower interbank lending rates. Libor, the cost to borrow in dollars, fell 7 basis points to 4.75%. It was at 4.29% last week and had been as low as 2.82% in September. Three-month Euribor fell to 5.32% from 5.38%.

Stock markets in the U.S. are closed for the Columbus Day holiday, but S&P futures were recently trading with a gain of over 5%. In the currency markets, EUR/USD and GBP/USD have made slight gains on the day, but are well off their lows. USD/JPY has declined modestly but the pair is also well above its low on the day.

Full text of the Fed's statement:

In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.

Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.

Federal Reserve Actions

To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.

These arrangements have been authorized through April 30, 2009.

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