It is ironic that for all the talk of the Fed’s “exit strategy” from crisis-era policies, US officials were called together last night to reopen one of the main facilities of the meltdown.
Last night central banks announced they would start engaging in currency swaps again — a reminder of the continuing fragility of the global financial system.
If they work as intended, the swaps will help distressed European banks (suffering under the weight of Greek, Spanish and Portuguese securities) to access dollar funding more easily through the ECB, the Bank of England and the Swiss National Bank. These swaps were used heavily during the financial crisis, and had only been halted at the beginning of this year.
If nothing else, the aggressive move by the Fed underscores how officials remain concerned about a “double-dip” recession, even though Ben Bernanke, chairman, has indicated those risks are receding. Still, Greece did come up at the FOMC meeting at the end of April, and may have been one of the factors behind the decision not to remove the pledge for exceptionally low interest rates for an “extended period”.
Fed officials have proudly stated throughout the year that financial markets were gaining strength and that the Fed’s closure of emergency facilities was proceeding on schedule and without any glitches. So it must be shocking for officials to have to dust off one of those tools and bring it back into use.
Instinctively, it feels like all this means a much longer wait for tighter monetary policy. But at the Fed, officials may feel that by acting early, they are increasing the chances that there will be no “contagion” to the US economy, and therefore, exit strategy talk can happily continue.
