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Fed will monetize stocks for its primary dealer banks

Section: Daily Dispatches

Fed to Lend Against Stocks and Bonds in Bid to Stabilize Markets

By James Politi, Brendan Greeley, Colby Smith, and Joe Rennison
Financial Times, London
Tuesday, March 17, 2020

The US Federal Reserve took new action tonight to shore up financial markets by allowing approved dealers in government debt to borrow cash secured against some stocks, municipal debt, and higher-rated corporate bonds.

The Fed said in a statement that the facility would "allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households" in the face of the coronavirus outbreak.

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The new facility will offer funding with maturities up to 90 days starting on March 20 and be in place for at least six months. Credit extended under the new facility for primary dealers would be collateralised by a "broad range" of investment grade debt, including commercial paper, municipal bonds, and equities. The interest rate charged would be the discount rate of 25 basis points.

The new facility was established with the approval of Steven Mnuchin, the US Treasury secretary. "The global coronavirus outbreak has contributed to significant financial market volatility," Mr. Mnuchin said in a statement, adding that the move would "help address illiquidity, mitigate disruptions in funding markets, support smooth market functioning, and help facilitate the availability of credit to American workers and businesses." ...

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