The Federal Reserve is stepping in again in an attempt to smooth global lending markets, this time by lending dollars to other central banks in exchange for Treasuries.
WASHINGTON – The Federal Reserve is stepping in once again in an attempt to smooth global lending markets, this time by lending dollars to other central banks in exchange for Treasuries.
The new lending program will allow other central banks to access dollars without having to sell Treasury securities. Excessive selling of treasury bills usually causes their interest rates or yields to rise, making borrowing more expensive. The Fed is trying to prevent this.
“This facility should help support the proper functioning of the US Treasury market by providing an alternative temporary source of US dollars other than the sale of securities on the open market,” he said in a statement.
Foreign central banks typically lend dollars to their country’s banks, which do much of their business in dollars.
The Fed has already expanded dollar “swap lines” with 14 central banks to swap dollars for an equal amount of currencies. The new program will allow central banks to sell Treasuries to the Fed, with an agreement to buy them back the next day – an operation known as a “repo” or repo. Central banks pay a low interest rate on what is essentially an overnight cash loans , which can be renewed.
As the coronavirus disrupted economies and financial markets, banks and other financial institutions have sought to sell Treasuries and other securities to raise cash. This selling pressure on some days pushed up Treasury yields and clogged financial markets as sellers struggled to find buyers. The Fed’s foreign lending program will allow foreign central banks to convert treasury bills into cash without having to sell them.
The program will begin on April 6 and run for at least six months, the Fed said.