Could the Fed follow the Bank of England into ‘funding for lending’?

July 16, 2012

Federal Reserve Chairman Ben Bernanke “might have something up his sleeve next week” when he delivers his semi-annual monetary policy report to Congress: he could hint at a “funding for lending” program similar to what the Bank of England announced last month, according to one long-time Fed watcher.

If the Fed wants to ease again, the first lever they pull might not be more quantitative easing where the Fed buys government bonds to help keep interest rates low in the hope that low rates will foster lending and economic growth, says  Decision Economics economist Cary Leahey.

Bernanke is scheduled to testify before the Senate Banking Committee on Tuesday and in front of the House Financial Services Committee on Wednesday.

They might try something else — perhaps a program not unlike the Bank of England ‘funding for lending’ scheme which explicitly ties increases in bank lending to lower funding costs from the central bank.

This possibility first entered investors’ imagination following a June press conference with Bernanke, in which he seemed remarkably open to the prospect of adopting a similar measure.

We’re very interested in it, and we’re certainly going to follow it. The details are not yet available. And I think it should be noted that it’s not just a Bank of England program, but it’s joint with the British Treasury. So the question – one question might be, how much of a fiscal component is there? Is there some kind of fiscal subsidy being included there?

But we are looking for – as you know, throughout the crisis, we’ve looked for new programs, new ways to help the economy. And this will be a type of thing that will be on the list of programs that we look at.

On Friday, Britain revealed details of the new plan – announced last month – aimed at making around 80 billion pounds of worth of loans more accessible to households and businesses, a development that could help lift the economy out of recession.

Finance Minister George Osborne and Bank of England Governor Mervyn King jointly announced the “funding for lending” arrangement last month, under which the BoE will give banks cheap access to finance if the banks, in turn, lend the money to businesses and home-buyers. That plan ties banks’ access to the plan – and its cost – directly to whether banks raise total lending to British firms and households.

Leahey assigned a small chance of the Fed announcing such a program as soon as its next two-day policy meeting on July 31 and August 1.

It may be too soon; a new program takes some explaining. If you want to get it up and running by September, you probably need a (Fed) Board presentation at the next FOMC meeting at the very least – and then act on it in September.

But since a similar program has already been undertaken by the Bank of England and Bernanke has already called it an interesting idea, that could ease understanding and acceptance of such a measure, Leahey said.

It very well may be that the Fed has already discussed it at an FOMC meeting. In the minutes of the last meeting, some members suggested looking at other policy tools which might be sign language that QE3 is possible, but they may want to try something different.

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It’s about time the Fed put some restrictions on the billions given to banks. I can’t believe this was not the plan from day one. Giving the banks money and expecting them to do the “right thing”, as in lending it out to small business and private citizens, without specific guidelines, was pure folly! What did they do instead? They sat on it, used it to pad thier bottom line. Used it as window dressing to make it look like they were doing great. Use it to spur the economy? That is laughable. Trusting banks to do anything to help anything or anyone besides themselves is ridiculously nieve, if not grossly negligent policy.

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