US Fed prepares to replenish war chest

[katty]

By Stephen Foley in New York
Thursday, 10 April 2008

more:

http://www.independent.co.uk/news/business/news/us-fed-prepares-to-replenish-war-chest-807075.html

EXCERPT: While the Fed could lend money to banks without dipping into its reserves, and continue doing so even if reserves run out, this is in effect printing money, and officials fear the inflationary consequences of doing so.

For this reason, officials confirmed yesterday that the Fed is considering ways to replenish its stockpile of US Treasury bonds, which has dwindled from $792bn last July to $487bn last week. Since the credit crisis hit, the Fed has come up with a raft of innovative schemes for lending to the financial markets. In particular, it has begun taking as collateral mortgage-backed securities, which banks have been reluctant to trade while their value has been plummeting alongside the housing market.

One option is for the Fed to take the unprecedented step of issuing debt, which it would then lend on into the credit markets. Another plan is to ask the US Treasury to issue more debt which the Fed could put to work.

Another option would be for the Fed to start paying interest on any excess deposits that US banks have at the central bank. That would set a floor for the interbank lending rate.

Separately yesterday, leading banks promised tougher voluntary standards in an attempt to forestall calls for tighter supervision.