Term auction facility

The Term Auction Facility is an instrument of monetary policy, introduced by the Federal Reserve to increase liquidity in United States financial markets. Although first instated as a temporary policy, as of 21 December 2007, the Fed will continue to hold bi-weekly auctions through the TAF. [ [http://www.federalreserve.gov/newsevents/press/monetary/20071221b.htm Federal Reserve Press Release] ]

Credit Crunch

Early in August 2007, the subprime crisis began to show in international finance. Two banks in Europe were the first to go into crisis and many more both in the US and abroad were presenting subprime lending on their balance sheets. The ECB began distributing funds through a discount window or fine-tuning operation. By August 9th, the ECB lent €95 billion ($112 billion in the days conversion) to EU banks, and the Fed distributed $12 billion through repo operations. [ [http://www.thestreet.com/s/fed-ecb-respond-to-credit-crunch/newsanalysis/wallstreet/10373298.html?puc=_dm The Street 9 August 2007] ] [ [http://www.iht.com/articles/ap/2007/08/10/business/EU-FIN-Europe-Market-Jitters.php International Herald Tribune 10 August 2007] ]

Creation of Facility

On December 11, 2007, the Fed lowered its discount rate to 4.75%, but due to the lack of borrowing from the discount window in the previous weeks, and a lack of liquidity after the 2007 credit crunch, the Federal Reserve and several other central banks opened their short term lending windows, hoping to alleviate the strain on interbank lending markets. In the Federal Funds market the Fed, along with the Bank of Canada, Bank of England, the European Central Bank and the Swiss National Bank, decided to implement a new monetary instrument the following day. This program, known in the US as the "Term Auction Facility", enables the Fed to auction a set amount of funds to depository institutions, against a wide range of collateral. Auctions held on December 17 and December 20 released $20 billion each in the form of 28- and 35-day loans, respectively. [FRB: Press Release Dec 12th http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm] On the December 17th Auction, bids began at 4.17% and ended with a rate of 4.65%, substantially below the discount rate. The Fed received over $63 billion in bids and released the full $20 billion to 93 different institutions. [FRB: Press Release Dec 19th http://www.federalreserve.gov/newsevents/press/monetary/20071219c.htm]

As part of an effort to increase dollar liquidity around the world, the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly. On December 11, the ECB held a simultaneous auction, in dollars, and awarded $10 billion at the rate determined by the Fed's auction. [ECB: Tender operation allotment http://www.ecb.int/mopo/implement/omo/html/TAF07001_all.en.html] To facilitate the provision of U.S.-dollar liquidity by these other central banks, the Fed arranged currency swap lines with the ECB and the SNB in amounts of $20 billion and $4 billion, respectively.

The Fed is using the TAF as a trial of this type of monetary tool. Depending on its success and usefulness, the Fed may begin to use it as part of a more permanent program.

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