Fed steps in to ease funding pressures

The Federal Reserve stepped in again to pull out the US economy off the mortgage crisis.

Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (TAF) 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).

The first TAF auction of USD 20 billion was held on Monday (December 17), with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, Jan. 17, 2008. Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).
The second auction of up to USD 20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January.

Under the Term Auction Facility (TAF) program, the Federal Reserve auctioned term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.