Twice now since the start of the year US stockmarket indices have flirted with steep falls and near death experiences.
And twice the US Federal Reserve has stepped in with a major move to steady a shrinking ship.
The first, on January 22, came after markets plunged in Australia, Asia and Europe with the US closed on a Monday for a public holiday.
With US market futures signalling a 500 point fall, the Fed rushed out an emergency inter meeting in its key Federal Funds rate and discount rate of 0.75%, and then followed it up 8 days later with another cut of 0.50%.
That steadied the markets for four weeks but they then drifted lower as renewed credit concerns erupted, culminating with a surge to record levels on Thursday of credit insurance security prices covering banks in the US, Europe, Asia and Australia.
Friday night, our time, just before trading started, the Fed moved a second time in a major way, announcing its liquidity boosting measures.
Then the US Government produced February jobs figures showing 63,000 jobs were lost in the month, with the number lost in January revised to show more jobs were lost than previously thought.
The Fed’s move took the edge off the jobs news, which shocked US commentators who had optimistically been tipping a 25,000 jobs increase!
The Fed revealed plans to try and ease the credit crisis by boosting amount of loans it plans to make available to banks this month to $US100 billion, and will add a further $US100 billion through other ways.
That steadied the markets, and instead of Thursday’s crunching 215 point fall, we got a 146 point, or 1.2% drop in the Dow on Friday (and smaller falls on NASDAQ).
Analysts say investor risk aversion is spreading and the Fed can see this in the price action of all asset classes: shares, commercial and retail property, credit derivatives of all types, home mortgages including, triple A rated bonds, subprime mortgages; municipal bonds, corporate bonds and securities of all types.
Only US Government securities are holding up as investors once again go into cash and other safe havens.
The Fed said in its statement Friday that it will boost the size of auctions planned for March 10 and March 24 to $US50 billion each. That is up from the $US30 billion limits it had previously announced. The auctions act as short-term loans to get banks the cash they need to keep lending to their customers.
This money is auctioned to a wide range of banks. The Fed said in the statement that it planned to continue the auctions for at least six months, and would boost the amounts involved, if needed.
In a second step, the Fed said it will make $US100 billion available to a broad range of financial players through a series of separate deals starting last Friday.
The Fed has been injecting billions of dollars into the US banking system to maintain liquidity in the face of the deepest and most persistent credit squeeze for generations.
The central bank started its new type of auction in December to provide short-term loans to cash-strapped banks in hopes of keeping them lending and so, the Fed has lent $US160 billion in short-term loans to banks through six auctions.
The Federal Reserve is scheduled to meet on March 18 to consider rates. Some US analysts haven’t ruled out a cut before then if conditions worsen, especially in money and credit markets.
As a result of the jobs figures on Friday, plus the continuing and remorseless slump in housing, fears are growing that the country is teetering on the edge of a recession, if one has not already begun.
Senior Federal Reserve officials were reported as telling US media that the steps it announced Friday were geared to providing relief to credit markets, which have deteriorated further in recent days, and not related to the weak employment figures.
The Fed said that a “rapid deterioration” in the credit markets in recent days had prompted it to begin a series of fresh cash injections in an effort to shore up the balance sheets of America’s stricken banks.
"First, the amounts outstanding in the Term Auction Facility (TAF) will be increased to $US100 billion. The auctions on March 10 and March 24 each will be increased to $US50 billion
"To provide increased certainty to market participants, the Federal Reserve will continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.
"Second, beginning today, the Federal Reserve will initiate a series of term repurchase transactions that are expected to cumulate to $US100 billion. These transactions will be conducted as 28-day term repurchase (RP) agreements in which primary dealers may elect to deliver as collateral any of the types of securities–Treasury, agency debt, or agency mortgage-backed securities–that are eligible as collateral in conventional open market operations. As with the TAF auction sizes, the Federal Reserve will increase the sizes of these term repo operations if conditions warrant.
"The Federal Reserve is in close consultation with foreign central bank counterparts concerning liquidity conditions in markets."
We saw the decision Thursday by Citigroup to wind back mortgage lending by $US45 billion over the next year to try and rebuild reserves and capital and concentrate on higher yield deals (which are not in great supply either, at the moment). Citigroup is America’s fourth biggest mortgage lender. The move will add to the downward pressure on home prices and increase foreclosures.
Big factors were the failure of the London-based Peleton hedge fund 10 days ago, and then the failure of Carlyle Capital Corporation and Thornton Mortgage Co to meet margin calls covering the financing of their multi-billion dollar portfolios of their mostly AAA-rated US m
