Fed, other central banks set joint liquidity operation

United States Federal Reserve building, Washington D.C.

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The U.S. Federal Reserve collaborated with other global central banks to make sure dollars are available to stem any liquidity concerns in the global financial system.

The Fed on Sunday said it had joined with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank in a coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements.

In doing so, the monetary authorities said the moved would “serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.”

The move came the same day as UBS announced it was buying Credit Suisse to help shore up concerns about the global financial system. Swiss authorities brokered the deal to prevent a disorderly collapse of the bank and concerns rise about financial turmoil on both sides of the Atlantic.

“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily,” the Fed said in a statement issued alongside announcements from the other five central banks.

Operations will commence on Monday and will continue at least through the end of April, the Fed said.

The move comes just a few days ahead of the Fed’s two-day meeting, after which it will announce its intentions on interest rates. Markets on Sunday evening were pricing in about a 74% chance of a quarter percentage point rate increase on Wednesday, according to the CME Group’s FedWatch gauge.

The UBS-Credit Suisse deal and swap lines maneuver probably raises the chance of a rate hike, said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

“The implications for the Fed Wednesday are far from clear-cut. In principle the interventions clear the way for a cautious 25-then-see hike, still our base case. But the FX swap flags US global concerns and if we were to see a severe adverse reaction in European financials to the news this could stop out a hike,” Guha said in a client note.

—Reuters contributed to this report.