Fed says economic gains reduce need for some loan programs
The Federal Reserve, signaling increased optimism that the economy is improving, is scaling back some of the emergency loan programs it created over the last 18 months to deal with the nation’s financial crisis.
But the Fed is still concerned about the fragile state of financial markets and said it would extend several of the same programs until early next year in case they might be needed.
“Things have stabilized,” said former Fed economist Timothy Yeager, an associate finance professor at the University of Arkansas. “There don’t seem to be any more large firms on the brink of failure, and they feel confident that they can start to pull these things back. Yet they don’t want to completely remove [the programs] in case they’re needed down the line.”
Together, the actions could mark the start of the Fed’s exit from its unprecedented intervention into credit and other markets to keep the financial system from collapse. The announcement came after the Fed’s Open Market Committee said Wednesday that it would keep interest rates near zero and continue expanding the money supply.
“Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time,” the Fed said in announcing Thursday’s moves.
The recession has shown signs of easing in recent weeks, but new federal data showed the difficulty in gauging whether the slump has bottomed out.
The Bureau of Economic Analysis on Thursday revised its figure for first-quarter gross domestic product, saying the economy contracted at an annual rate of 5.5%, an improvement from the 5.7% it had estimated.
And the Labor Department also reported Thursday that new jobless claims rose last week to 627,000, up 15,000 from the previous week.
Beginning in December 2007, the Fed launched several programs to improve liquidity and credit for businesses and other market functions. But as economic conditions have improved, use of those programs has declined, senior Fed officials said.
For example, the Term Auction Facility, which makes large amounts of money available to banks and other depositary institutions through auctions, has seen bid amounts decline considerably in recent weeks. As a result, the Fed’s Board of Governors decided to reduce the amount of money available to $125 billion from $150 billion, beginning with the July 13 auction.
The amount might be cut further if market conditions improve.
That program does not have an expiration date. But four programs set to expire at the end of October have been extended by the Fed until Feb. 1, 2010, as insurance in case the economy backslides. Those programs are aimed at money market funds and short-term credit for businesses.
One of those programs is the Commercial Paper Funding Facility. Launched in October 2008 as credit markets had ground to a halt, it made the Fed for the first time the lender of last resort to corporate America by promising to purchase hundreds of billions of dollars in short-term commercial paper, a type of loan crucial to the daily operations of businesses.
Fed officials said the amounts the program has lent have decreased as credit markets have improved.
The Fed also extended temporary arrangements with the central banks of 13 foreign countries until Feb. 1. The Fed swaps dollars with those banks for foreign currency to improve the liquidity of the dollar abroad. The foreign currency is held as collateral for the dollars.
As funding markets have improved, those swaps have declined from a peak of $586 billion in December to less than $150 billion last week.
The Fed is allowing one program, the Money Market Investor Funding Facility, to expire at the end of October. It was started last October to help provide liquidity to money market investors after the share price for one leading money market fund dipped below the standard $1 a share. Fed officials said the program was never used.
The Fed did not make a decision on one of its largest temporary programs, the Term Asset-Backed Securities Loan Facility. The program, begun in November, was designed to loosen consumer lending. It extends loans to investors to help them buy securities backed by consumer credit, such as auto loans, credit cards and student loans. It is set to expire Dec. 31, giving the Fed more time to decide if it should be extended, officials said.
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