1999-08-30 07:57:19 Subject: FED Raises the Paper Money Order by $20 Billion Link: http://www.news.com/News/Item/0,4,0-41047,00.html?st.ne... Comment: This report says that the Federal Reserve System has asked the Treasury for $70 billipn, not $50 billion. The extra $20 billion is for foreigners.

Foreigners?

The FED will not be giving this money away. It will be lending it to banks that cannot buy it by selling off assets.

This is a Reuters story from C/NET (Aug. 28).

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. . . "The Fed sees it as a separate issue from monetary policy," said James Annable, director of economics at Bank One. "It is a big, huge important issue that can't be remedied or treated with monetary policy," he added. "It won't stand in the way [of rate changes]. That is their feeling."

Fed officials see Y2K as a time-limited problem while monetary policy is a long-term tool, he added. . . .

Although the Fed expects the banking system's computers to function normally through the transition, a host of other problems could arise related to the public's behavior.

One of the Fed's chief concerns is that masses of people might try to withdraw large sums of cash on the eve of the New Year, taxing banks' supplies of currency. Businesses may prefer to hold larger sums in cash because of uncertainty.

To maintain public confidence in the banking system it is crucial to meet increased demands for cash and credit.

Meanwhile banks may become more risk-averse, cutting back on loans to borrowers with less-than-stellar credit profiles. . . .

The minutes of the June 29-30 FOMC [Federal Open Market Committee] meeting, released Thursday, said the Fed anticipates the effects on economic activity from Y2K fallout would be "limited or negligible," adding somewhat to growth later this year and temporarily reducing growth next year.

"Unless markets turn disorderly, the Fed won't hesitate to raise interest rates because of anticipated problems associated with Y2K," Morgan Stanley's Berner said.

The Fed has set up a special loan facility to help banks handle any liquidity problems arising from the century date change--increased demand for cash or credit, greater caution by lenders or depositors, or potential market disruptions.

The Fed has not announced any cap on the facility which will be in effect from October 1, 1999, to April 7, 2000.

The arrangement allows commercial banks to borrow directly from the Fed against collateral at a rate 1.5 percentage points above the target federal funds rate, currently 5.25 percent.

The Y2K related-loans would have fewer restrictions on use and duration than borrowing from the Fed's discount window and banks would not need to seek funds elsewhere first.

Annable dubbed the loan facility a "drive-through discount window" because of the ease of obtaining funds. The last time the Fed was prepared to supply so much liquidity to the system was in the aftermath of the 1987 stock market crash, he said.

Separately, the Fed has asked the Treasury to print about $50 billion to meet any increased domestic demand, and $20 billion for international contingencies. Normally the Fed holds about $150 billion in reserve.

"The Fed sees this as a major test of their stewardship over financial markets," Annable said. "They are going to provide the liquidity no matter what the fed funds rate is."

Link: http://www.news.com/News/Item/0,4,0-41047,00.html?st.ne...

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-- zoobie (zoobiezoob@yahoo.com), August 30, 1999

Answers

Yeah, they're fed-ex'ing 20 1 billion dollar notes to japan, england, tonga, the falklands etc.

-- Andy (2000EOD@prodigy.net), August 30, 1999.