Reporting from Washington — Reflecting improving economic conditions but continued concern about the state of financial markets, the Federal Reserve said today it would scale back some of the temporary loan programs it created over the past 18 months but also extend others until early 2010 in case they are still needed.
The moves could mark the beginning of an exit strategy by the Fed of its unprecedented intervention into credit and other markets during the financial crisis. The announcement came after the Fed's Open Market Commission said Wednesday that it would keep interest rates near zero and continue expanding the money supply.
"Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time," the Fed said today in announcing the moves.
Beginning in December 2007, the Fed launched several programs to improve liquidity and credit for businesses and money market mutual funds and for other market functions. But as economic conditions have improved, use of those programs has declined, senior Fed officials said.
For example, the Term Auction Facility, which makes large amounts of money available to banks and other depositary institutions through auctions, has seen bid amounts decline considerably in recent weeks. As a result, the Fed's Board of Governors decided to reduce the amount of money available to $125 billion from $150 billion beginning with the July 13 auction. The amount might be gradually reduced further if market conditions improve.
That program does not have an expiration date. But several other programs were set to expire at the end of October. The Fed decided to extend them until Feb. 1.
One involves swap arrangements between the Fed and central banks of 14 foreign countries. As funding markets have improved, those swaps have declined from a peak of $586 billion during the crisis to $150 billion. The program was extended in case it continues to be needed.
The Fed did not make a decision on one of its largest temporary programs, the Term Asset-Backed Securities Loan Facility, known as TALF. The program, launched in October as credit markets had ground to a halt, made the Fed for the first time the lender of last resort to corporate America by promising to purchase hundreds of billions of dollars in short-term commercial paper, a type of loan crucial to the daily operations of businesses.
That program is set to expire Dec. 31, giving the Fed more time to decide if it should be extended, Fed officials said.
jim.puzzanghera@latimes.com
