Fed Boosts Liquidity Measures

The Federal Reserve in conjunction with European central banks on Friday said it would pump up to an extra $50 billion a month into the banking system through its biweekly auctions among other steps taken to combat illiquidity in the market.

Beginning Monday, The Fed will now auction $75 billion through the term auction facility every other week, up from $50 billion. The central bank created the facility in December, as tight credit markets left banks unwilling to lend to each other. Through the facility, the Fed offers short-term funds to qualified commercial banks and lenders like Washington Mutual(WM Quote - Cramer on WM - Stock Picks) and Bank of America(BAC Quote - Cramer on BAC - Stock Picks) in exchange for an array of collateral.

The Federal Open Market Committee also okayed increases to its existing reciprocal currency agreements with the European Central Bank and Swiss National Bank. The central bank will now provide up to $50 billion, an increase of $20 billion, to the European Central Bank and up to $12 billion, an increase of $6 billion, to the Swiss National Bank. The agreements were extended through Jan. 30, 2009.

The Fed also said it will now also accept AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations, as collateral for Treasuries it lends to primary dealers such as Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) and Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks) through its term securities lending facility auction. The change goes into effect Wednesday.

The Fed's moves come at a time conditions in the credit markets have been markedly improving.

While many banks reported losses or declining profits in the first quarter, most were able to tap public markets to raise capital to shore up balance sheets depleted by the credit crunch. Citigroup(C Quote - Cramer on C - Stock Picks) and Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) both raised money after swinging to losses and writing down billions to the value of securities tied to mortgages and other debt. And even JPMorgan Chase(JPM Quote - Cramer on JPM - Stock Picks), which is regarded as having navigated the crisis better than most of its peers, took the opportunity to raise money.

Meanwhile, credit spreads have been narrowing, suggesting the market for debt-related instruments is slowly returning, and the New York Fed's term securities lending facility auction of $25 billion in Treasuries was undersubscribed Thursday, indicating primary dealers' demand for more liquid assets was declining.