Today's Big Announcement From the Federal Reserve:
"Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.
Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).
Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window."
My Spin: This agreement attacks the biggest issue for banks: sky high Libor interest rates as compared to Fed Funds. In other words, the rate cut by the Federal Reserve yesterday not only was deemed not enough, but wasn't passed through to lower Libor rates. The transmission mechanism for Fed policy is clearly not working and that is why this program was hatched. Now it becomes a question of size. Will the amounts the Fed offers be enough to reduce the spread between overnight Libor and Fed Funds? I'm thinking it'll help, but I'm guessing that every money market desk out there is trying to gauge how much they can take down.
Ok, Here's What We Really Mean: In what appears to be the first ever post-FOMC press conference, a US Federal Reserve official has made a series of comments relating to the FOMC rate decision and the establishment of a temporary Term Auction Facility (TAF) to provide funding.
Liquidity steps not about specific institutions, aimed at market function.
Today's announcement in works for a while, not response to Tuesday's market action.
Auction facility (TAF) should not have same stigma as borrowing from discount window.
Fed didn't cut discount rate due to concerns on keeping control of amount of funds borrowed.
Market will not know which banks borrow from auction facility.
How odd is it that this "Senior Fed Official" wouldn't officially go on the record for this commentary? The fact that this official needed to unofficially explain the Fed's actions on rates and on TAF speaks volumes. The abecedarians at the Fed need to get a grip on how they write their statements by not only being more precise in their language, but also ensuring that they eliminate market confusion by including all the pertinent information.
Really, was it so hard to announce the rate moves and then immediately provide the information on the TAF? How basic is this function for a central bank?
Andrew B. Busch
Global FX Strategist
(312) 845-2879
1-800-438-0434
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