Federal Reserve & Interest Rates

The Federal reserve Board of Governors approved a new plan to “help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.” This arrangement, called the Term Auction Facility (TAF), along with Foreign Exchange swap lines, is set to take effect Monday, December 17th.

“Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $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.”

According to the press release, third and fourth auctions are planned for mid January and January 28, 2008. Bids will be submitted by depositories through their local Reserve Banks. The minimum bid rate is to be figured at the OIS, overnight indexed swap, rate relative to the maturity of the credit being auctioned.

The Bank of Canada, the Bank of England, the Swiss National Bank, and the European Central Bank are all involved in the effort to address the elevated pressures in short-term funding markets. The U.S. Federal Reserve has arranged for FOREX swap lines with the European Central Bank and the Swiss National Bank. Basically, securities can be used as collateral for liquid funds for lending purposes.

The swap lines are approved for six months, tentatively.

The mortgage problem is expected to only get worse. Another 500,000-700,000 foreclosures are anticipated. If the value of homes drops more than 30%, there could be more than 20 million homeowners with negative equity.

Recession is still a looming fear. It is time to buckle down on spending, pay back as much debt as possible, and hold on tight. It is going to be a bumpy ride in 2008.