Lending markets

Fed steps in again to try to smooth credit markets

WASHINGTON — The Federal Reserve is once again stepping in to try to smooth global credit markets, this time by lending dollars to other central banks in exchange for Treasury bills.

The Fed’s decision on Tuesday marks its latest aggressive effort to keep borrowing rates low and ensure financial markets can still function in the face of the coronavirus outbreak. The virus has brought economic activity to a virtual standstill in the United States and abroad and made it harder for some banks and businesses to borrow. The Fed is trying to facilitate lending and build 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. Overselling treasury bills usually causes their interest rates, or yields, to rise, making borrowing more expensive. The Fed is trying to prevent that.

“This facility should help support the proper functioning of the US Treasury market by providing a temporary alternative source of US dollars other than open market sales of securities,” he said in a statement.

Foreign central banks typically lend dollars to domestic banks, which conduct much of their business in dollars.

The Fed has already expanded dollar “swap lines” with 14 central banks to swap dollars for an equal amount of foreign currency. The new program will allow central banks to sell Treasuries to the Fed, with an agreement to buy them back the next day – a transaction known as a “repurchase agreement” or repo. 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 Treasuries and other securities to raise cash. This selling pressure has on some days pushed up Treasury yields and clogged financial markets as sellers struggled to find buyers. The Fed’s foreign lending program will allow foreign central banks to convert treasury bills into cash without having to sell them.

The program will begin on April 6 and will continue for at least six months, the Fed said.