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Fed Sees Need to Address Liquidity Problems Again

Tue, Mar 11 2008, 23:13 GMT
by Asha Bangalore

Northern Trust

Fed Sees Need to Address Liquidity Problems Again

The Fed coordinated with other central banks on new initiatives to reduce stress in financial markets today. The new program at the Fed carries the name Term Securities Lending Facility (TSLF) under which it will lend up to $200 billion of Treasury securities to primary dealers for a term of 28 days (existing program is overnight lending) against collateral inclusive of federal agency debt, mortgage backed securities of Fannie Mae and Freddie Mac, and non-agency quality residential mortgage backed securities. Auctions under this program will commence on March 27. In addition, the Fed increased swap lines with the European Central Bank and Swiss National Bank of amounts up to $30 billion and $6 billion, respectively. These initiatives follow after the Fed announced last week an increase in the size of Term Auction Facility and extended the term of open market repurchase agreements.

Will these actions unfreeze credit markets? It is a matter of time before we see the results. The rally in equity markets is a positive step. Market spreads had widened in recent days and raised new concerns about the credit crunch. In light of these actions, it appears the Fed will probably settle with a 50 bps reduction in the federal funds rate on March 18 vs. the market expectations of a more aggressive move.

Trade Deficit - Petroleum Imports Offset Growth in Exports

The trade deficit widened to $58.2 billion in January from a revised $57.9 billion trade gap in December, previously reported as a $58.7 billion trade deficit. The upward revision of the December trade gap should translate into a slightly higher headline GDP for the fourth quarter, holding other things constant.

In January, exports of goods and services increased 1.6% after a 1.5% gain in December. Inflation adjusted exports of goods rose 0.3% in January, following a sharp 1.4% gain in the prior month. On a year-to-year basis, exports of goods show a pace of growth (see chart 3) that exceeds 8.0%. Imports of goods and services increased 1.3% in January, largely due to a higher import bill. Inflation adjusted imports of petroleum rose 8.8% in January compared with a 0.7% gain in the prior month. The non-petroleum trade balance improved to $36.9 billion in January from $39.4 billion in the prior month.

Inflation adjusted imports of goods, reflecting weak economic conditions, grew only 0.4% from a year ago. This weak performance should continue in the near term.

The trade gap widened vis-à-vis China ($20.3 billion vs. $18.8 billion in January) and Canada ($5.9 billion vs. $4.7 billion in January), but narrowed vis-à-vis Mexico ($5.1 billion vs. $6.5 billion in January) and Europe ($5.1 billion vs. $6.1 billion in January) but was nearly steady with respect to Japan ($6.6 billion).

Small Businesses Remain Pessimistic About Outlook

The Business Optimism Index of small businesses rose slightly to 92.9 in February from 91.8 in January. The index is at a level comparable to levels seen in the 1990 recession.

Indexes tracking responses about sales in the next months and the whether it “is a good time to expand” are at levels seen several years ago (see chart 5). Essentially, the small business sector is not signaling robust business conditions.

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Published on  Tue, Mar 11 2008, 23:18 GMT