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Fed Pumping Less Cash Into Recovering Banks

Friday, 28 Aug 2009 02:47 PM

The U.S. Federal Reserve said Friday it is scaling back offerings of emergency cash to banks amid waning demand in a step toward pulling back its extraordinary support for the financial system, which appears to be stabilizing after a devastating crisis.

The Fed said it will reduce each of its two Term Auction Facility auctions in September to $75 billion from $100 billion.

The Fed created TAF auctions to supply financial institutions with cash as the credit meltdown, which began in the second half of 2007, became more pronounced and the Fed steadily increased the amounts it was offering.

In its most recent auction, the Fed offered $100 billion but had bids for only $73.4 billion.

As financial markets heal, the Fed will begin to exit from its policies of providing massive liquidity and cutting interest rates to near zero.

"If the government doesn't have to provide a backstop anymore it suggests confidence is on the rise, and indicates that credit markets are repairing," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Richmond Fed President Jeffrey Lacker said on Thursday the Fed should curtail its purchases of longer-term securities if an economic rebound that appears to be in place gains strength.

Lacker and others are concerned the Fed's bloated balance sheet will set the stage for inflation when the recovery gets going.

"Anything that'll help reduce the Fed's balance sheet is greatly welcome," Ablin said. "I would expect further steps down the line."

Some Fed programs will roll off naturally as demand dies down. Others, such as the purchases of longer-term Treasury and mortgage-related securities, will be harder to unwind.

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The U.S. Federal Reserve said Friday it is scaling back offerings of emergency cash to banks amid waning demand in a step toward pulling back its extraordinary support for the financial system, which appears to be stabilizing after a devastating crisis. The Fed said it will...
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2009-47-28
 

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