The Federal Reserve is intervening once again to try to smooth out the world’s lending markets, this time by lending dollars to other central banks in exchange for Treasurys.
The Fed’s move Tuesday marks its latest aggressive effort to keep borrowing rates down and ensure that financial markets can still function in the face of the coronavirus outbreak.
The virus has caused a near-shutdown of economic activity in the United States and abroad and made it harder for some banks and companies to borrow. The Fed is trying to facilitate lending and boost confidence that it will do all it can to support the global financial system.
The new lending program will allow other central banks to access dollars without having to sell Treasury securities. Excessive selling of Treasurys typically causes their interest rates, or yields, to rise, and that makes borrowing more expensive. The Fed is trying to prevent this.
“This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market,” it said in a statement.
Foreign central banks typically lend dollars to banks in their countries, which conduct much of their business in dollars.
The Fed has already expanded dollar “swap lines” with 14 central banks to exchange dollars for an equal amount of foreign currency. The new program will let central banks sell Treasurys to the Fed, with an agreement to buy them back the next day — a trade known as a “repurchase agreement” or repo. The central banks pay a small interest rate on what is essentially an overnight loan, which can be repeated.
As the coronavirus has disrupted economies and financial markets, banks and other financial institutions have sought to sell Treasurys and other securities to raise cash.
This selling pressure has, on some days, driven up Treasury yields and clogged financial markets as sellers have struggled to find buyers. The Fed’s overseas lending program will enable foreign central banks to convert Treasuries to cash without having to sell them.
The program will start April 6 and continue for at least six months, the Fed said.