ECB outshines the Fed with its record funding

June 24, 2009

Though the Federal Reserve continues to capture the undivided attention of global markets, the real fireworks Wednesday were found across the Atlantic.

Where the Fed did essentially nothing, the European Central Bank pumped in a record Euro442 billion ($612.8 billion) through it’s first ever offering of 1-year funding at the low, low cost of 1%.

This hopefully will leave participating banks sated, and will provide enough stimulus to right the euro-zone economy.

The ECB operation Wednesday, though distinct from the type of quantitative easing adopted by the Fed and the Bank of England, for all intents and purposes achieves the same goal: flooding the financial system with liquidity to ensure credit continues to flow.

Barclays Capital estimates that the much stronger than expected demand for the 1-year funds leaves the banking sector’s coffers flush with about Euro270 billion in excess reserves, a substantial cushion that should go a long way in easing concerns about weak European financial institutions. More than 1,100 banks participated in the operation – well above the more typical 500-550 seen at weekly auctions.

It also should further drive down benchmark short-term lending rates that had already started moving into record low territory ahead of the ECB auction. On Tuesday, for example, the 12-month London interbank offered rate was 1.60% in euros versus 1.68% in dollars, noted Barclays, which forecasts another 3-4 basis point dip over the next few days.

The impact could also be felt outside of the ECB’s jurisdiction since U.S. banks, for example, with branches in the euro-zone also qualified for the cheap funding, noted Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Compare this with the much anticipated meeting of the Federal Open Market Committee later Wednesday. Nothing much happened.

Policy makers, as expected, left their rock bottom overnight interest rates unchanged at between zero and 0.25% and quantitative easing initiative untouched. It’s the latter where there was hope in some quarters that the Fed would at the very least extend the $300 billion purchase program beyond the current expiration date in September. After all it, together with its $1.45 billion mortgage-related program, is its primary tool in keeping longer-term interest rates, read mortgage rates, under control.

The Fed will have another opportunity in August to revisit tweaking its QE program so if “green shoots” once again start popping up, central bank can juice its monetary policy even further.

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