prepared to pump as much money into the system as may be needed to offset any disruptions caused by year-2000 problems.
Peter R. Fisher, executive vice president of the Federal Reserve Bank of New York and the manager of the System Open Market Account, the body that implements the central bank's monetary policy, disclosed a number of technical changes that will make it easier for banks to fund themselves around yearend.
Analysts said the fact that Mr. Fisher himself called in the press and the Fed's primary securities dealers to announce the changes underscored the importance the central bank puts on assuring the market that liquidity will not dry up. Shortly after the 9:30 a.m. press conference at the New York Fed, Mr. Fisher held a similar meeting with the Fed's primary securities dealers.
The year-2000-related measures include a significant expansion of collateral acceptable in repurchase transactions by the New York Fed, a lengthening of the maturities of those transactions to 90 days from 60 days, and the creation of a special standby financing facility in December and January.
Mr. Fisher emphasized that the Fed was not signaling that it expects serious problems in December and January, but acknowledged that "the unknown factor" remains, since "we've never been through a century date change before."
Mr. Fisher, in answer to a question, said the Fed has not been able to determine how much more liquidity the new measures would make available.
Companies, especially banks, have been spending billions of dollars in their race to be prepared in case computer programs fail or produce false data because they cannot recognize the 2000 date. As yearend approaches, the year-2000 issue is expected to generate anxiety among investors and consumers.
Mr. Fisher described the Fed's moves -- which were approved by the Federal Open Market Committee at its meeting on Aug. 24 -- as "preventive and preemptive" because of the potential for expanded reserve needs in the banking system at yearend.
One way banks obtain liquidity from the Fed is by entering repurchase agreements with it, in which they sell a U.S. government security to the central bank and agree to buy it back on a specific date. By accepting additional types of securities, the amount of liquidity available will be increased substantially.
For that reason the Fed is broadening the types of securities it will accept as collateral. Included will be pass-through mortgage securities of the government-sponsored secondary market organizations, Ginnie Mae, Freddie Mac, and Fannie Mae, along with "strip" securities of the Treasury and of other government agencies. Strips are pieces of securities that are traded in the financial markets. For example, one strip might represent interest paid on a security, while another might represent principal.
To gain access to this larger pool of securities, Mr. Fisher said the New York Fed will establish custody arrangements with commercial banks to manage the clearing and settlement of collateral. These arrangements are expected to be in place in early October.
The expanded list of acceptable collateral will be effective through next April. The policy will then be reviewed by the Open Market Committee, which might make it permanent.
A permanent change already approved by the committee raises the maximum maturity of repurchase transactions to 90 days, from 60 days. Mr. Fisher said this change will bring the New York Fed's operations into better alignment with market practice, where 90 days is the standard.
And he said 90-day terms will give the Fed greater ability to deal with the pattern of demand now expected in relation to 2000. Heightened activity is anticipated in November, December, and January, he said.
A considerably bigger move is the Open Market Committee authorization for the New York Fed to operate a temporary standby financing facility through the auctioning of options on overnight repurchase agreements in December and January.
In a statement, the New York Fed said the facility "is intended to provide greater assurance that there will be sufficient depth and liquidity in short-term funding markets" to permit market participants -- including the Fed itself -- to make necessary yearend balance-sheet adjustments.
Mr. Fisher said the New York Fed will sell the option to its regular counterparties in open market operations, the primary dealers, at three strike prices, each of which will be a defined spread to the Open Market Committee's target rate for the federal funds rate.
He said a strike price of 150 basis points over the funds rate target is under consideration, as well as two wider spreads, on individual option contracts valued at $50 million.
Primary dealers will be able to exercise the options on specific days, probably during the last two weeks of December and first two weeks of January.
"We hope the options will not be exercised," he said, "but the intent is to provide a piece of insurance" against the risk that market rates could move widely from their normal ranges.
Discussions to set details of the standby financing facility are under way between the New York Fed and the primary dealers.
