Fed, ECB, Central Banks Coordinate to Add Liquidity (Scott Lanman)

Created by : Francis Goodwin View profile

By Scott Lanman

Dec. 12 (Bloomberg) -- The Federal Reserve plans to ease ``elevated'' short-term funding pressures by injecting cash to banks through auctions and providing $24 billion in currency swap lines to the European and Swiss central banks.

The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank, the Fed said in a statement in Washington. The Fed will auction term funds to banks against a ``wide variety of collateral.'' All ``generally sound'' institutions can participate, the statement said.

The central banks are taking the steps after demand for cash sent borrowing costs climbing. The Fed's previous attempts to ease the credit squeeze that began in August have failed to have lasting effects. One gauge watched by central bankers, the three- month dollar London Interbank Offered Rate, rose to 5.15 percent a week ago, the highest in almost two months.

``It's an important policy response to the deterioration in credit market conditions that we've experienced in recent months,'' said Neil MacKinnon, a former U.K. Treasury official who is chief economist at London-based hedge fund ECU Group. ``It's a coordinated effort and that's important; it suggests the central banks are ready to provide liquidity on demand.''