The Fed's shot in the arm

As part of the coordinated global effort to administer a shot in the arm to the faltering credit market, the US Federal Reserve will hold more auctions from its newly created 'Term Auction Facility' (TAF) on Monday and then two weeks later.

Banks have made it clear there is more demand for TAF funds than the Fed was offering.  Reports suggest 30 billion dollars is to be auctioned on both dates -- that is 10 billion dollars higher than the auctions held in December.

Since August, the Fed has lowered the discount rate for primary credit borrowings. But borrowings have been subdued, and this could be because borrowing through the 'discount window' has been stigmatised as a sign of financial distress. These auctions aim to mitigate the broader market-wide liquidity shortage, offering banks the chance to borrow at rates lower than the existing discount window facility and without the associated stigma. 

The TAF targets interest rate spreads by essentially reducing the risk premia charged in the interbank lending markets, whereas standard open market operations control the level of short-term interest rates.