taf stuff

earlier today, the fed announced that it would increase the size of its taf by $40 billion to $100 billion per month, spread out over two auctions.

the taf has become a substitute for the Fed's discount window, which has been shunned for decades because of the stigma attached to those that would go to the Fed, seemingly in desperation for money in order to sustain their operations.

banks obviously feel more comfortable bidding to obtain loans that many other banks are also seeking to obtain. the taf is a targeted facility, enabling banks that need money to obtain it, as opposed to open-market operations, wherein the fed's injections of money wind up in whichever bank the participating primary dealers choose to deposit the funds they obtain in exchange for the collateral they submit to the fed. In this way, it is an effective tool.

today the taf announcement was made to "address heightened liquidity pressures in term funding markets, " the key word there is "term," as opposed to "short-term," which was cited in previous taf announcements, which date back to december. this shows that the fed had become concerned about the rise in credit spreads, particularly the rise in mortgage rates relative to treasuries.

another feature of the fed's press release was the announcement of an intention to add a cumulative $100 billion into the financial system via 28-day term repurchase agreements. one of the important elements of this, as opposed to the taf, is that it broadens the safety net to include wall street dealers; the taf is available only to banks.

here is the fed's announcement on the repo plan, which mentions that dealers can submit agency debt and agency MBS, which is nothing new:

"Beginning today, the Federal Reserve will initiate a series of term-repurchase transactions that are expected to cumulate to $100 billion. These transactions will be conducted as 28-day term-repurchase (RP) Agreements, in which primary dealers may elect to deliver as collateral any of the types of securities -- Treasury, agency debt or agency mortgage-backed securities -- that are eligible as collateral in conventional open-market operations. As with the TAF auction sizes, the Federal Reserve will increase the sizes of these term-repo operations if conditions warrant."

if these measures fail, and if the term markets seize up, many expect that the fed would consider purchasing agencies for their own account.

the fed currently owns only treasuries, but has the authority to buy agencies. another possibility mentioned by bernanke in 2002 is the idea that the fed would buy long-term treasuries. these are both extreme measures, but they are supposedly potent tools.