Fed Extends Lending Facilities Through April
The Fed’s balance sheet has ballooned over the past year as they attempt to pump trillions of dollars in liquidity into credit markets. With the financial crisis intensifying in October in the wake of the Lehman Brothers collapse they have announced that they are extending the life span of three key lending facilities.
In light of continuing strains in financial markets, the Federal Reserve on Tuesday announced the extension through April 30, 2009, of three liquidity facilities: the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF). These facilities had previously been authorized through January 30, 2009.
This will be the second time that they have extended these programs, which were initially created after credit markets tightened up after the Bear Stearns fire sale to JP Morgan back in March. Despite their best efforts, credit markets have continued to deteriorate as private sources of investment have dried up.
In the beginning, many institution may have been wary of borrowing from the Fed because of the perception of weakness that this would entail. Now for many, this source of liquidity is their means for survival.
Still, the alarming growth of the Fed’s balance sheet has many economists concerned as the Fed has opened themselves up to considerable risk by taking on illiquid securities as collateral. The amount of liquidity the Fed has committed to the banking system, dwarfs the $700 billion financial rescue package by comparison.
With the country facing the worst economic downturn since the Great Depression you can’t blame the Fed for taking these extraordinary steps. A major reason why the Fed is able to expand the money supply this much is due to the free fall in the price of oil, which has fallen more than $100 off it’s July high.
Whether these steps will forestall the rapid decline in spending remains to be seen.
