Last night at 9:15 p.m., as part of a $1 trillion international package to rescue Europe from its debt as Greece teeters on the brink of default, the U.S. Federal Reserve announced it has reopened currency swap lines with the European Central Bank. Essentially, the Fed will print dollars and trade them for euros, providing liquidity for European money markets.
The New York Times reports that the program does not carry much risk for the United States, in terms of debt, currency value or stability more generally, and that a similar program in 2007 actually made the Fed a bit of money:
The swap operations do not carry any exchange rate risks or credit risks, the Fed said. The Fed would not be a party to whatever dollar-denominated loans the European Central Bank may make to European financial institutions. …
The Fed actually made money from the previous dollar swap program. The foreign central banks paid the Fed interest equivalent to what they made from lending the dollars. The Fed, however, did not pay any interest on the foreign currencies it took in exchange, having agreed to hold them instead of lending them out or investing them in the private markets. The new program is designed the same way.
That said, the agreement does increase the size of the Fed’s balance sheet, and at a time when it is under extraordinary scrutiny for its extraordinary programs. (The Federal Open Market Committee approved the move in an emergency videoconference session yesterday.) The Senate is due to vote on Sen. Bernie Sanders’ (I-Vt.) Audit the Fed amendment to financial regulatory reform tomorrow. (There are no Senate votes scheduled for today.) Notably, the Audit the Fed amendment would not allow government auditors to scrutinize such foreign-currency swap agreements made by the Fed.
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