Fed Works With Other Central Banks To Increase US Dollar Liquidity

By Kevin • March 20, 2023 9:39 pm • Comments

It looks like the major central banks all around the world are now working together in order to increase US dollar liquidity as a result of the banking crisis and UBS’s acquisition of Credit Suisse.

The banks that are involved include the US Federal Reserve, the European Central Bank, Bank of Canada, the Swiss National bank, and a few more.

This may mean that there will be major changes to the Fed’s monetary policy as a result of this collaboration, but the details are still unclear.

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Authorities are saying that this is being done in order to ease the “strains in global funding markets”, but how it will ease it exactly may be questionable.

If it involves creating additional money supply in any shape or form, concerns of inflation will certainly be the most obvious as a direct result.

CNBC reports:

The move came the same day as UBS announced it was buying Credit Suisse to help shore up concerns about the global financial system.

Swiss authorities brokered the deal to prevent a disorderly collapse of the bank and concerns rise about financial turmoil on both sides of the Atlantic.

“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily,” the Fed said in a statement issued alongside announcements from the other five central banks.

Operations will commence on Monday and will continue at least through the end of April, the Fed said.

This announcement comes ahead of the Fed’s upcoming announcement regarding what it will do regarding interest rates.

The Fed’s rapid increasing of rates was one of the reasons that led to the downfall of banks like SVB and some are concerned that continued hikes will cause a repeat of that.

With that being said, not raising rates will present the risk of inflation going back up and will undo a lot of the work that the Fed has been doing to combat inflation.

With the changing of these swap lines to improve liquidity by the central banks of the world, investors and speculators should keep a sharp eye on how the markets will react.

Watcher.guru concludes:

Swap lines are basically agreements between central banks to exchange currencies. In the most basic essence, such arrangements assist a central bank in obtaining foreign currency from the central bank that issues it, and in turn, distribute it to commercial banks in their country.

According to the official press release, the network of swap lines among these central banks “is a set of available standing facilities.”

In fact, they serve as an “important liquidity backstop” to ease exertions in global funding markets. Consequentially, it aids in mitigating the retrospective effects on the supply of credit to businesses, households, etc.

Towards the end of last week, the Federal regulators indicated that they will continue aiding the distressed sector. The Reserve “stands ready” to provide liquidity via the discount window to all eligible institutions.

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