Federal Reserve Stopping Emergency Credit Market Programs

Federal Reserve to wind down several emergency programs


The Federal Reserve will allow several of its special programs supporting credit markets to expire early next year, winding down some of the unconventional efforts to prop up the financial system during the depths of the 2008 crisis.

The Fed said Wednesday, following a two-day policy making meeting, that it will allow five special lending programs -- designed to support money market mutual funds, short-term corporate lending and investment banks -- to cease to exist Feb. 1. It will also move to wind down special arrangements to pump hundreds of billions of dollars into other nations' banking systems.

It represents the clearest step yet by the Fed to return its policy to normal , though it continues its expansive effort to stimulate the economy overall. At the same meeting, the Federal Open Market Committee kept its target for short-term interest rates near zero, where it has been for a year, and said that it is likely to keep rates "exceptionally low" for "an extended period."

The Fed leaders implicitly acknowledged recent signs of economic improvement -- the unemployment rate ticked down in November, among other positive indicators -- even as they signaled that they intend to keep their foot on the accelerator to try to spur stronger growth.

Recent evidence suggests that "economic activity has continued to pick up and that the deterioration in the labor market is abating," said the Federal Open Market Committee in a statement following its final meeting of the year. "The housing sector has shown some signs of improvement over recent months."

The special lending programs being wound down were created over the course of 2008, using an emergency lending authority under which the Fed can lend to almost any entity in "unusual and exigent circumstances." Fed leaders have long known that they must eventually eliminate the programs, but they had repeatedly extended those efforts. Many of the programs have fallen into disuse as financial markets broadly have stabilized.

With the announcement Wednesday, the Fed indicated that there will be no more extensions for the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility.

Another program, the Term Asset-Backed Securities Loan Facility, or TALF, is not scheduled to expire until March 31 for some parts of the programs and June 30 for others.

The meeting came at an unusual time for the Fed and for its chairman, Ben S. Bernanke. The central bank is under considerable fire on Capitol Hill for its actions during the crisis, and some lawmakers want to strip it of its power to supervise banks. And Bernanke is up for confirmation for a second four-year term as chairman, which the Senate Banking Committee is scheduled to vote on Thursday. Also Wednesday, Bernanke was named Time magazine's Person of the Year, for his expansive efforts to contain the financial crisis and the recession over the course of 2008.


Sources: Washington Post