Rather, it just changes the composition of the reserves from debt to cash.īy extending this option for foreign governments to meet their cash needs in this very challenging time, it’s allowing central banks to access cash without having to print more of their currency in order to buy dollars. Notably, the facility doesn’t add to country’s central bank reserves. The Fed’s new liquidity scheme is designed to help those countries weather the liquidity and recession storm by allowing their economies to function with dollars in their system that would ordinarily not be there under the current exceptional financial and economic circumstances. But it does make them more vulnerable, since they’re still on the hook for servicing their dollar-denominated debt. With global business activity plunging in the first quarter of 2020, these smaller economies aren’t the only countries seeing their export volumes crash as the CCP pandemic spreads worldwide. This new action by the Federal Reserve is particularly helpful to emerging economies, which have taken advantage of low-interest U.S. In effect, the Federal Reserve is acting like the central banker to much of the world, flooding the world with trillions of dollars to keep up with the liquidity demand. In fact, it’s never been done before, not even during the 2008 Global Financial Crisis. Treasury bond holdings in exchange for dollars.Įven though it’s described as a temporary arrangement, it still a bigger deal than many realize. The Fed’s response has been to allow foreign central banks to swap their U.S.
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With so much of the global economy priced in U.S dollars, the Federal Reserve is trying to relieve the massive liquidity crunch that’s occurring around the world.
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As the CCP Virus pandemic brings business activity to a halt across much of the world, foreign central banks are facing cash shortages.