Fed asks Treasury for supplementary funding

The US Treasury department is creating a temporary supplementary funding programme at the request of the Federal Reserve. The initiative has been devised to manage the balance-sheet impact of the Fed’s lending and liquidity operations, and ensure it can continue to provide support to the strained US financial system.

The move comes one day after the Fed announced it would lend insurance company American International Group (AIG) up to $85 billion, in return for a 79.9% equity stake in the firm.

A spokeswoman at the Treasury said the Federal Reserve’s request was “not in response to AIG specifically”, and that the initiative was created “to help the Fed with the series of steps it has taken over the past several quarters”.

The proposed programme will consist of a series of Treasury bill auctions. The Treasury hopes the proceeds from these auctions, which will be placed in an account at the Fed, will help “offset the impact of recent Federal Reserve lending and liquidity initiatives”. The first auction took place today and was for $40 billion. Two more auctions, each worth $30 billion, have also been announced.

The Treasury has not stated a definite time scale for the length of the programme.

See also:

US authorities step in to rescue GSEs
Fed to support Fannie and Freddie