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Fed Eases Terms Under Which It Lends To Primary Dealers to Reduce Financial Market Stress

Mon, Sep 15 2008, 23:55 GMT
by Asha Bangalore

Northern Trust

Fed Eases Terms Under Which It Lends To Primary Dealers to Reduce Financial Market Stress

The Fed announced on September 14 it would accept more risky assets as collateral from primary dealers to provide funds under the Primary Dealer Credit Facility (PDCF) and Term Securities Lending Facility (TSLF). The Fed now accepts a broader range of securities such as those used in the tri-party repo systems of the two clearing banks, which includes equity securities and non-investment grade debt securities. Prior to this announcement, PDCF collateral included only investment grade securities. Securities eligible under the TSLF program are all investment grade debt securities compared with only Treasury securities, agency securities, and AAA-rate mortgage-backed and asset backed securities prior to this announcement. In addition to broadening the securities considered suitable for funding at the Fed, the frequency and amount of TSLF auctions were changed. The TSLF auctions will be held weekly instead of bi-weekly and the amount offered has been raised to $200 billion from $175 billion. Lastly, the existing regulation that limits bank holding companies’ to fund assets with customer deposits has been lifted. This and PDCF, TSLF, and swap lines are scheduled to expire on January 30, 2009. The ECB and Bank of England also threw in monetary lifelines to calm financial markets.

Industrial Production Plunges in August

Industrial production fell 1.1% after a downwardly-revised 0.1% gain in July. The large monthly decline was due to an 11.9% drop in production of motor vehicles. Total factory production fell 1.0% in August, after a 0.1% drop in the prior month. A drop in factory production of a similar magnitude, excluding the Katrina-related decline, was last seen in 2003 (see chart 1). Excluding autos, factory production declined 0.3%. Precautionary shutdowns due to Hurricane Gustav led to a drop in production at refineries. Mild weather led to a 3.2% reduction in utilities. Production in the high-tech sector held steady in August after a 1.3% increase in the prior month.

The operating rate of the factory sector fell to 76.6%, down 3 percentage points from a year ago (see chart 2). In sum, industrial production data suggest that the economy is in the midst of a recession.

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Published on  Tue, Sep 16 2008, 00:01 GMT