Fed Pumps Another $35B Into US Financial System Friday to Stem Credit Turmoil http://biz.yahoo.com/ap/070810/fed_liquidity.html?.v=16
Briefing.com Chief Economist Tim Rogers discusses the Fed's Repo Actions, saying Central bank operations have been a focal point for the market this week, as central bankers are trying to bridge the liquidity gap created by illiquid mortgage-backed securities (MBS). With defaults leaving MBS valuations unclear, the market for those securities has frozen. That's not a small thing either, as it's a $2 trillion market! Accordingly, central banks are doing their part to stem the repercussions of the freeze in attempting to cover the lack of market liquidity. Specifically, central banks are now stepping in to replace the inter-bank lending done using MBS as collateral. The collateral is exchanged for cash as lenders protect against losses by steering clear of the suspect MBS which could include sub-prime, interest only, Alt-A or any of the variety now seeing defaults. The thinking that central banks are providing more cash than usual in a coordinated effort and the understanding that the European Central Bank alone has injected more than $200 bln in the past two days, has sparked some speculation that central bankers are working to stem a systemic risk that would jeopardize economic growth. We're not buying into that view. Injecting funds into the banking system is a standard procedure that is carried out every day by central banks. Over the last few days, however, the liquidity need has been extremely large given the near removal of a large piece of the collateral base -- MBS... Briefly, the central bank lends money to banks and take collateral from the banks for doing so in the form of Treasuries or Agencies, as well as MBS. The Federal Reserve provided $38 billion Friday in a three-part action. All of the lending was backed by MBS collateral -- essentially filling a gap created in the market. The collateral will be returned at the end of the weekend term of the loan and the Fed will re-assess the liquidity demand on Monday. To be clear, this isn't a Fed bailout. It is lending that is intended to calm a market with illiquid debt given the inability to accurately price the issues. Just how deep the losses in these MBS are, and the speed with which they can be priced and sold, provides the outlook on how long the Fed and other central banks will need to offset the drop in liquidity with increased intraday lending. Briefing.com does not expect the Fed to respond with an ease in policy unless the large liquidity need evolves into a credit crunch where banks become hesitant to lend. Lending for low quality mortgages has already dropped sharply -- as it should. The data doesn't yet show any increased hesitancy on the part of banks to lend to qualified businesses. The stock market, though, is discounting the idea that it soon will. Time will tell. In the interim consider that a policy ease won't change the underlying situation as the poor mortgage lending standards included in existing MBS continue to leave the market cautious about their value.
The FED added funds because the fed funds rate was at ~6% and they wanted it at 5.75%. Who cares, it means nothing.