Adds economist quotes, background
The Federal Reserve said on Tuesday it would establish a lending program that allows foreign central banks to access dollars in its latest effort to avert a strain in dollar funding amid market volatility due to the coronavirus pandemic.
The facility allows overseas monetary authorities to temporarily exchange their US Treasuries held with the central bank for dollars, the Fed said.
On March 25, foreign governments held US$2.87trn in Treasuries with the Fed, the latest Fed data showed.
The FIMA Repo Facility "should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities in the open market," it said in a statement.
The repo program is an additional Fed tool, along with the its dollar liquidity swap lines with foreign central banks, which are intended to help ease stress in global dollar funding markets.
The Fed will charge an interest rate of 25bp plus the interest on excess reserves, which is currently at 0.10%, for these overnight repo loans.
Foreign central banks have been using the Fed's swap lines to borrow dollars since the virus-induced market disruption began.
They had US$206.05bn in loans from these swap lines on March 25, compared with US$18.71bn a month earlier. At the height of global credit crisis, overseas central banks drew US$582.5bn in December 2008, Fed data showed.
Lending from FIMA repo facility will start on April 6 and will last for at least six months, the Fed said.
"This introduces a new gear to the Fed's balance sheet expansion," said G-plus Economics chief economist Lena Komileva.
"The Fed is struggling to buy assets fast enough and it is now seeking to monetize the globally held supply of Treasuries, for which the Fed acts as a custodian," she said.
The Fed's aggressive bond purchases and launch of various lending programs have enlarged its balance sheet above US$5trn, which is higher than the peak set during the height of the global credit crisis over 11 years ago.
"The question is will it be enough to normalize US financial conditions?," Komileva said.