Fed’s dollar swap lines and ‘Fima’ facility to run nine more months

The Federal Reserve has agreed to extend the dollar swap lines it re-established during the Covid-19 crisis to guard against further instability in 2021.

The announcement came alongside the Fed’s latest monetary policy decision, where it kept its main tools on hold, but adjusted the guidance around its asset purchases.

The Fed says it will keep its swap lines open until September 30, 2021, noting that the extension should “help sustain recent improvements in global US dollar funding markets by serving as an important liquidity backstop”. It has renewed its foreign and international monetary authorities (Fima) repo facility for the same period.

The extension of the swap lines applies to the central banks of Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore and Sweden. The Bank of Canada, Bank of England, European Central Bank, Bank of Japan and Swiss National Bank have permanent and unlimited swap lines with the Fed.

The total amount drawn through the swap lines rose to a peak of nearly $450 billion in early May, as the fallout from the Covid-19 crisis caused a worldwide dash to hold dollar cash (see figure 1).

Since then, demand for the facilities has fallen markedly, with just over $10 billion outstanding on December 10.

Guidance tweaked

The Federal Open Market Committee kept policy broadly unchanged in its decision on December 16. The FOMC kept the federal funds rate at 0–0.25%. The Fed’s asset purchases will continue at a rate of $80 billion in Treasuries per month and $40 billion in agency mortgage-backed securities.

The FOMC did alter its guidance to state that purchases will continue until “substantial further progress” is made towards the Fed’s inflation and employment goals. Previously, the FOMC had said purchases would continue “over the coming months”.

Analysts took this wording as a slightly more dovish tilt to the Fed’s policy, though some had hoped for more.

“There was some speculation that the Fed could do more [quantitative easing] or could focus their asset purchases at the long end of the curve to help keep a lid on household and corporate borrowing costs, but perhaps signs of movement on a fiscal relief package reduced the need for near-term action in their minds,” economists at ING said in a note.

The FOMC has become somewhat more optimistic on the outlook for the US economy, its updated forecasts show. The median of FOMC members’ projections is now for a drop in GDP of 2.4% this year, versus a drop of 3.7% forecast in September. The median projection for 2021 is 4.2%, up from 4%.

FOMC members likewise expect a slightly faster recovery of inflation next year, to 1.8%, up from the 1.7% forecast in September, and lower unemployment – 5% in 2021, down from the 5.5% foreseen in September.

FOMC chair Jerome Powell noted the recovery had progressed faster than expected, but he added that the “pace of improvement has moderated” in recent months.

“We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible,” he said.