Column : How the Fed feeds India

Font Size

Print

Feedback

Email

Discuss

: of this worked. Cutting its target rates to zero and earlier discontinuing the SPF were patent signals acknowledging this reality.

The array of refinancing facilities that have been progressively added to the liquidity enhancing operations also show the “mission creep” of policy interventions, and that the Fed had in effect been running a quantitative easing programme much before its formal announcement in December. These have been three characteristics of these operations: (1) a rapid widening of acceptable securities as collateral against the Fed’s loans (2) expansion of the range of institutions eligible for refinancing and support and (3) an increase in the tenor and maturity of the financing.

The granddaddy of its interventions was the term auction facility, followed by the term securities lending facility (both confined to banks), then expanded to the primary dealer credit facility (to broker dealers, investment bankers and the like). A change in stance in these liquidity facilities (and a willingness to essentially lend directly to borrowers) was in the commercial paper funding facility in early October. One reason for the shift was the OMOs had virtually doubled the high power money base (M0) without achieving the goal of making banks increase their lending. The CPFF allowed the Fed to target the term funding markets more directly; investors had earlier been dumping commercial paper and increasingly shifting to bank deposits. CPs are a vital component of corporate credit in the US and had been particularly affected in the crisis. This was followed by the money markets investors funding facility. Now comes a term asset-backed securities loan facility to facilitate the extension of credit to households and small businesses.

Is what the Fed doing, then, the best way to go? Is an expansion of direct lending to various funding instrument classes a better option than bloating its balance sheet with purchases of “large quantities of agency debt and mortgage-backed securities and—longer-term treasury securities”? Probably. Even if longer-term Treasury yields are brought down (and thereby mortgage rates), there is no guarantee of increased availability of funds. The fear is that, in taking credit exposure directly, the Fed is not equipped to pick one corporate or lending line versus another. In the meantime, the Fed’s balance sheet has ballooned from $900 billion before the meltdown in mid-September to over $2.2 trillion now.