Central Banks Working to Cut Liquidity Risk - Geithner

Includes: DIA, IEF, QQQ, SPY
by: Judith Levy

Central banks around the world are coordinating the ways they craft policies and supervisory practices in order to mitigage the effects the credit crisis will have on the global economy, said Timothy Geithner, President of the New York Fed, on Thursday. Geithner is also vice-chairman of the FOMC, which sets interest rates. On Wednesday, the Fed, the European Central Bank and the British, Swiss and Canadian central banks unveiled new tools designed to increase liquidity. "They're all facing the same sort of panic-driven tightness in the money markets," said Lehman Brothers economist Ethan Harris. "They're all in the same boat on this. You can't pretend the markets are unconnected."

On Tuesday, the Fed cut short term interest rates, bringing the fed-funds rate down a percentage point from September (full story). The Fed is also setting up a "Temporary Auction Facility" that will inject up to $40 billion in the form of two offerings of up to $20 billion each by the end of December (full story). More auctions will take place in January. The facility will be accessible to all institutions that are eligible to approach the discount window. The LIBOR responded positively to the announcement of the facility, dropping to 4.99% from 5.06% Wednesday. The WSJ notes, however, that the LIBOR remains well above the Fed's overnight rate of 4.25%, indicating that banks are still reluctant to lend even to one another.

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