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The Federal Reserve is launching new facilities designed to provide liquidity to major Wall Street banks and foreign institutions such as central banks, which could help ensure market stability during times of stress.
The central bank said on Wednesday that it would set up a permanent pension facility, effective Thursday. The Fed said the new tool would accept Treasury securities, agency debt and agency mortgage-backed securities of distribution companies in exchange for one-day cash loans, at a rate of 0. , 25%. He said there was a daily cap of $ 500 billion on the facility, and he offered a similar tool to foreign official institutions.
The Fed has said it will extend access to the permanent pension facility to deposit banks in the future. The facility intended for primary dealers will see daily operations, and that for foreign central banks will operate as needed.
The new facility is a safety net for financial markets priced at a level that would discourage active use, Federal Reserve Chairman Jerome Powell said at a press conference following the meeting. of the Federal Open Market Committee of the central bank. The permanent pension facility is “there to help deal with pressures in the money markets that could hamper the effective implementation of monetary policy,” he said.
The establishment of such a permanent facility reduces the prospects that the Fed will have to add liquidity to the markets on an ad hoc basis through repo or repo agreements. These pensions are de facto short-term cash loans to eligible financial companies, guaranteed by Treasury bonds or mortgages. Over the past two years, the Fed has had to engage in these repo operations to bolster the banking sector’s reserves and to help weather the first wave of market panic caused by the coronavirus pandemic.
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