Move Will Help Ease Strains In Financial Markets: IMF

Source : The Business Times, March 13, 2008

FED'S US$200b LIQUIDITY BOOST

But it won't cure what ails the economy, says the bank's first deputy MD

(WASHINGTON) The US Federal Reserve's decision to pump more cash into a stressed banking system will not solve US economic problems, a senior International Monetary Fund (IMF) official said on Tuesday. But the move will help ease strains in financial and credit markets.

John Lipsky, the IMF's first deputy managing director, told Reuters that coordinated moves by the Fed and four other central banks to prop up global credit markets showed they were aware of what's going on and willing to take innovative actions.

'Is this going to cure what ails the economy? I would guess everyone realises the answer to that is 'no'. Is this going to be helpful in addressing the strains in financial markets? For sure, the answer is 'yes',' Mr Lipsky said.

In the past few days the Fed has pumped a total of US$400 billion into the US banking system. Separately, the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank announced measures to boost liquidity.

On Tuesday alone, the Fed expanded its lending plan offering up to US$200 billion of highly liquid US Treasuries to primary dealers. The move won applause on Wall Street, calming US markets as US stocks rallied more than 3 per cent giving the Dow and Nasdaq its biggest daily percentage gains since March 2003.

'Is this the definitive solution? Who knows? It's certainly not clear,' Mr Lipsky said, 'but the bigger message is that the Fed, like other central banks, has recognised the seriousness of the situation . . . and have been willing to react in a forthright way and have been willing to be innovative in that reaction'.

'If this action is insufficient you would expect that there will be a willingness to take new action when appropriate,' he added.

Mr Lipsky said central banks had worked closely for some time to deal with the credit turmoil, which began with an increase in defaults in the US sub-prime housing mortgage market and spilled into European markets.

He said their actions were 'clearly intended to be seen as coordinated'.

'It reflects their recognition that issues, especially financial issues today, are inevitably global issues . . . and can't be viewed effectively as a piecemeal issue facing one or another economy or market, and that is a clear message and not a coincidence,' he added.

Mr Lipsky said the Fed was 'appropriately' paying close attention to links between financial market strains and the broader US economy.

Asked whether there was a risk that central banks were not getting traction with efforts to bolster credit markets, Mr Lipsky replied: 'Of course, but remember they are responding to some fundamental signals in the economy and mostly acutely to the weakness in the housing sector.'

'It is not going to be solved until there is, on the one hand, greater certainty about the economic outlook and, secondly, that the economy seems healthier,' he said. -- Reuters