The Federal Reserve and four other central banks today pledged to meet in full demand for any amount of dollars requested by the financial system in their respective countries.
“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” the Fed said in a joint statement with the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank.
“The BoE, ECB and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day and 84-day maturities at fixed interest rates for full allotment,” the statement said, adding that the auctions will be conducted at a fixed interest rate announced ahead of the operations.
“The Bank of Japan will be considering the introduction of similar measures,” the statement also said.
The auctions will be funded by an increase to “whatever quantity of U.S. dollar funding is demanded” of existing swap lines with the three European central banks.
On Sept. 24, the Fed already had increased its swap lines with the ECB to $110 billion, the BoE to $40 billion and the SNB to $27 billion. The Fed also has swap lines of $60 billion with the BoJ and $10 billion with the Bank of Canada.
The decision, meant to improve liquidity in short-term U.S. dollar markets, immediately triggered a drop in money-market rates. In London, Euribor or the euro interbank offered rate dropped 26 basis points to 4.37% while the London interbank offered rate fell seven basis points to 4.75%. European and British bankers’ associations said these were the largest one-day drops in those rates this year.
The measure to unfreeze credit markets compounded the positive impact of coordinated decisions by governments around the world to support their banking systems, announced over the weekend.
Equities in Asia and Europe posted solid gains overnight and futures pointed to a strong start on Wall Street. The Dow Jones industrial average was up more than 300 points, or about 3.5%, in early trading today while the S&P 500 was up 34 points, or about 3.8%.
