Federal Reserve & Interest Rates

Tuesday, the Federal Reserve announced the results of Monday’s $50 billion Term Auction Facility (TAF).  This is the eighth TAF since the program was initiated back in December 2007.  The total amount that has been awarded as short-term loans to bidding banks is $260 billion.  This is an ongoing program that will continue until credit liquidity is stabilized.

Over $88 billion in bids were submitted on Monday, with $50 billion worth approved.  The stop-out rate for these 28-day credits (set to settle tomorrow, March 27th) is 2.615%.  This is the lowest rate the Federal Reserve has offered since the TAFs began.  There were 88 participants in the propositions.

The lending was initiated in December as part of the Federal Reserve’s effort to stop the effects of the credit crunch stemming from the sub-prime mortgage crisis.  Increase the liquidity in banks allows them the ability to lend to businesses and individuals for homes, cars, equipment and expansion.  The country thrives on credit, so it is extremely important to have increased flexibility in lending because the system cannot function with tight credit conditions.  That is why the Term Auction Facility was created.

The European Central Bank is taking similar actions.  Banks in need of cash flow were awarded a total of just over $77 billion in short-term loans.

We are undeniably suffering from major economic slowdown in this country. Some economists say that we are in recession, but the overall word is that this is just a slowdown.  Data suggests that there is definitely a slowdown, and whether or not we call this a recession is a matter of semantics.  Many are still not willing to call our situation a recession, while some have said that we have been in a recession for several months already.

Regardless of terminology, the economy has slowed down considerably, and there is a risk of it getting worse. If it gets worse, more will begin to say that we are officially in recession.  The Federal Reserve is not ready to call it that, and they are making as many moves as possible to avoid it, including Term Auction Facilities.  Hopefully, the TAFs will keep credit loose enough to keep credit conditions from becoming to tight.