(an interoffice email)

> – any chance they would take discount window rate down intra-meeting (or before year end)

seems they don’t have to with this new ‘facility.’

> – have u evaluated the “loan auction” story?

Seems a lot like ‘standard’ repo apart from accepting pretty much anything as collateral from member banks in good standing. This should allow any member bank to fund itself a the ‘stop’ of the auctions, and I’m guessing that stop will be maybe 25 over funds, just to have some semblence of a ‘penalty rate’ though with no ‘stigma.’

Non member banks will still need to borrow from member banks, most likely, and so to the extent they are in the libor basket the libor settings could stay higher than otherwise. Not sure how all that will settle out.

But member banks using the Fed as ‘broker of last resort’ means borrowing and lending with the Fed will keep the names of other banks off their books over year end, and may make room for member bank/non member bank lending. Hard to say, but prospects look pretty good for this to clear up the year end log jam. Also, the ECB could do same with a $ facility which would also help.

Keep me posted if you hear anything, thanks.


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2 Responses

  1. Hi Warren, you asked about timing of the liquidity functions and why it wasn’t announced with the FOMC statement. Article in Financial Times sheds some light:

    “The timing of the announcement was made difficult by concerns in some central
    banks that liquidity support operations should be distinct from monetary policy.”

    “The US Federal Reserve’s action in agreeing to lend dollars to the European
    Central Bank required the approval of the Federal Open Market Committee, so this
    had to come after the committee met on Tuesday. The ECB and the Bank of England
    are likely to have urged the Fed to delay the announcement because European
    central banks maintain a strict separation between official interest rate
    decisions and money market operations.”

  2. I hear you, but a) it’s just a guess they urged the Fed to delay, as per your comment. b) they could have announced in the statement that they were dealing with the liquidity function separately and would have an announcement the next day on their plan to expand the Fed’s lending facilities c) if your comment is correct, why didn’t the Fed could have stated it.

    And, if you are correct, interesting the Fed couldn’t come up with anything better than a sequence of events most likely to add vol to a situation already at risk due to excess vol.

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