qing02051981

Fed Plans to Ease Funding Pressures by Adding Cash (Update4)
2007-11-26 17:03 (New York)


(Adds Libor rate in seventh paragraph and Bernanke speech in
eighth paragraph.)

By Ye Xie and Craig Torres
Nov. 26 (Bloomberg) -- The Federal Reserve will provide
funds for banks to borrow in an attempt to forestall any cash
shortages at the end of the year, its first such operation since
December 2005.
The Fed's New York branch said in a statement that it plans
a series of repurchase agreements, starting with an $8 billion
injection on Nov. 28, extending into next year. The move follows
the European Central Bank's commitment last week to make extra
cash available to ``counter the re-emerging risk of volatility''
in money markets.
``The Fed is pulling out all stops to try to alleviate
funding pressures in the money and financing markets as the
markets lurch into year-end,'' said Chris Rupkey, senior
financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New
York.
Fed officials acted after the average U.S. overnight lending
rate between banks exceeded their target seven of the past eight
days, suggesting a reluctance to lend amid mounting subprime
mortgage losses. In most years, banks face year-end pressures as
they adjust their books to show ample liquidity and at the same
time meet a jump in demand for cash from consumers.
The New York Fed said it planned the steps ``in response to
heightened pressures in money markets for funding through the
year-end.'' Officials will ``provide sufficient reserves to
resist upward pressures'' on the benchmark federal funds rate
around year-end. The Nov. 28 repo will mature on Jan. 10.

`Still Fragile'

Policy makers judged that financial markets were ``still
fragile'' when they met to set interest rates Oct. 30-31,
according to minutes of the session released last week. ``Unusual
pressures in funding markets persisted,'' the Fed said.
The cost of borrowing dollars for three months rose for a
ninth day to 5.05 percent in London today, the British Bankers'
Association said. That's 55 basis points more than the Fed's
benchmark rate, the widest gap since the Fed cut its benchmark
rate for the first time in 4 1/2 years on Sept. 18.
Fed Chairman Ben S. Bernanke will have an opportunity to
comment on market developments when he speaks Nov. 29. The
central bank today expanded the scope of his remarks to include
the national economic outlook. Previously, he was scheduled to
give acceptance remarks for the Charlotte Chamber's Citizen of
the Carolinas Award and speak about the regional economy.

August Collapse

Fed officials in Washington, who confer daily with the New
York Fed's System Open Market Operations desk, have been attuned
to funding shortages since the credit-market collapse in August.
On Aug. 10, the central bank pledged to supply additional
reserves as needed to address funding constraints. The Fed also
reduced the discount rate, the charge for direct loans to banks,
to a half-point spread over the federal funds rate on Aug. 17.
The gap is usually 1 percentage point.
Policy makers also lowered the main rate by 75 basis points
in their past two meetings, to 4.5 percent, in an effort to
cushion the economy from the credit crunch and housing recession.
The discount rate is 5 percent. A basis point is 0.01 percentage
point.
Central bankers next meet to set rates Dec. 11. While Fed
Governor Randall Kroszner and other officials have expressed
skepticism on the need for additional rate cuts, traders are
betting on them.
Fed funds futures contracts show an 84 percent probability
of a quarter-point reduction next month, with a 77 percent chance
of a further rate cut in January.

`Magic Bullet'

``Given the heightened state of credit aversion going on it
looks like the only magic bullet that they have to help the
markets is a rate cut,'' Rupkey said.
Fed officials may be drawing on the playbook developed for
the 1999-2000 millennium year change. At that time, regulators
feared that obsolescent computers would wreak havoc with the
banking system. They developed the Special Liquidity Facility in
mid-1999, which included longer-term repurchase agreements and
the sale of options on repos.
The Fed arranged $5 billion in 28-day repos on Dec. 7, 2005,
and $4 billion through 52-day repos on Nov. 15, 2004. The Fed
didn't arrange such repos in 2006.
``What the Fed's trying to do here is let the market know
that they will provide liquidity around year-end, which is of
particular concern in financial markets right now,'' said Michael
Pond, an interest-rate strategist in New York at Barclays Capital
Inc. ``So anything they can do around that should help alleviate
concerns.''

Repo Agreements

In repos, the Fed buys U.S. Treasury, mortgage-backed and
so-called agency debt from its 21 primary dealers for a set
period, temporarily raising the amount of money available in the
banking system. At maturity, the securities are returned to the
dealers and the cash to the Fed. The Fed conducts short term
repos, ranging from overnight to two weeks, almost every day to
keep the Fed fund close to its target.
Louis Crandall, chief economist at Wrightson ICAP LLC in
Jersey City, New Jersey, said the Fed often does long-term repos
spanning year-end in November and December, and they usually
won't issue a statement to announce the move.
``Formalizing the procedure by announcing it, they intend to
boost confidence in the repo markets,'' said Crandall.
In a separate statement, the New York Fed said it will raise
the limits on the amount of Treasuries that dealers can borrow
from its System Open Market Account. Through the account, dealers
can borrow Treasury notes and bills that are scarce in the repo
market.

Higher Limit

Primary dealers will be able to borrow 25 percent of the
amount available, with a maximum of $750 million per Treasury
security, up from the previous limit of 20 percent with a maximum
of $500 million per issue, according to the Fed's statement.
The Fed said it has also increased the amount available for
borrowing each day to 90 percent of an issue from 65 percent.
Dealers can also borrow securities maturing in six days or
longer. The Fed had previously limited the borrowing only to
issues maturing in at least 13 days.
Demand for government bonds have increased as losses tied to
delinquent mortgages spread through the credit markets. The yield
on the benchmark 10-year Treasury note has declined 0.59
percentage point in the past month and touched 3.79 percent
today, the lowest since March 2004.

`Crucial' Market

Raising borrowing limits will help ``alleviate shortage of
securities that have developed recently,'' Tony Crescenzi, chief
bond market strategist at Miller Tabak & Co. in New York, wrote
in a research note. ``The action will in turn help maintain
functionality in the $4 trillion market for repurchase
agreements, a market crucial toward the financing of Wall
Street's fixed-income inventory.''
The New York Fed cut the minimum fee dealers pay to borrow
Treasuries from the central bank to a record low of 0.5 percent
on Aug. 21, from 1 percent.
In its daily open-market operation, the Fed added $10.25
billion through overnight repos today, when $6.3 billion in repos
was due to mature. Wrightson had expected the Fed to add as much
as $15 billion.
Repos help maintain enough money in the system to keep
overnight interest rates close to the central bank's target.
The overnight rate traded at 4.625 percent today, above the
Fed's 4.5 percent target rate.

--With reporting by Scott Lanman in Washington. Editors: Chris
Anstey, Daniel Moss

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