By Michael Mackenzie
Investors and dealers are bracing themselves for greater volatility around the sales of US Treasuries following a marked increase this week in direct buying of debt from the Federal Reserve, bypassing the big Wall Street banks that underwrite bond issuance.
On the heels of Sheila Bair’s earlier comments, the Fed has released a statement to the Senate banking committee arguing that it should continue its supervisory and regulatory role.
In it, the Fed makes at least one obvious statement: “We recognise, of course, that bank supervision, including ours, needs to be more effective than in the past.”
AIG is back on the House’s radar.
Earlier this week, Edolphus Towns, the Chairman of the House oversight committee, said he would subpoena the NY Fed for documents related to AIG counterparty payments and today he said that Tim Geithner had confirmed that he would speak before the committee later this month.
And separately, in a tersely worded response to Spencer Bachus, the Republican Ranking Member on the House Financial Services Committee, Barney Frank, the committee’s Democratic Chairman, said the Fed’s role in the AIG bail-out would be back on his committee’s agenda.
It is not, of course, the idea of looking into Chairman Ben Bernanke’s role that has Mr Frank up in arms. Mr Bernanke was, after all, a Republican appointee, and the decision to bail-out AIG and its counterparties came while Mr Bush was still president. It’s that Mr Bachus is continuing to focus on Tim Geithner, then head of the NY Fed and now Treasury Secretary.
But enough background, here’s the statement:
In the wake of the financial crisis, the Federal Reserve has made much of the dangers of using interest rates to “lean against” asset bubbles, such as the one in the housing market whose collapse brought the US economy to the brink. Fed governors have implied that this was their only practical tool. (There have been quieter on the influence they may have wielded by warning of the bubble). The problem, several Fed governors have said recently, lied in a failure of regulation.
At today’s Financial Crisis Inquiry Commission hearings, Sheila Bair, chairman of the FDIC, had a response: the Fed, she said, should have regulated.
Update: Redrado says ban not lifted
A US judge has lifted the freeze on Argentine central bank accounts held at the Fed, Argentina’s finance secretary told Reuters. Finance Secretary Hernan Lorenzino said Judge Thomas Griesa “lifted the measure so both sides can come to an agreement.”
The European Central Bank has been forced to delay an ambitious project to streamline Europe’s fragmented securities settlement systems. Slower-than-expected progress on initial stages of the project will mean delays of up to a year.
The development means that investment managers and broker-dealers across Europe will be forced to wait beyond 2013 for the relatively high cost of settlement to fall. Such costs, combined with the costs associated with clearing, are estimated to be up 10 times higher than in the US.
The central bank of Turkey has left its overnight borrowing rate at an historic low of 6.5 per cent, reports Bloomberg. Last month governor Durmus Yilmaz kept the rate steady, ending a 13-month series of cuts that reduced the benchmark by a total of 10.25 percentage points. The rate is the lowest since the bank started setting it in 2001. Minutes will be released within eight working days.
There was little new on ECB monetary policy from Jean-Claude Trichet, president, at his press conference – confirming that its main interest rate is firmly on hold. The introductory statement was virtually word-for-word the same as in December.
That left lots of time for questions on Greece, which clearly has a long way to go before it is back in favour in Frankfurt. Mr Trichet put the emphasis on Athens itself putting its finances back on course. He dismissed as “absurd” financial market chatter about Greece ever leaving the eurozone, and sidestepped questions about whether other European Union countries might help Greece out. “The problem is not to get help but to help oneself,” he argued.
The Danish central bank cut its key lending rate by 10 basis points to 1.05 per cent to ease strengthening pressure on the krone, in a surprise move just a week after its last cut. The new rate is effective tomorrow.
Last week’s cut was also prompted by a strong krone. The bank changes interest rates to keep the krone in a narrow band to the euro and since “money-market rates in the euro are still very low … the spread to the equivalent Danish rates has tended to strengthen the Danish krone.” Today’s cut was explained as “a consequence of purchases of foreign exchange in the market,” suggesting the bank has intervened in forex markets to soften the currency.
The European Central Bank has kept its main refinancing rate on hold at 1 per cent. No increase is expected before Q4 2010. The marginal lending facility and the deposit facility will also remain unchanged at 1.75 per cent and 0.25 per cent respectively. More on this after 2.30pm, when Trichet holds a press conference in Frankfurt to explain the decision.