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Crescenzi: Good News from the Fed's Auctions

Tuesday, 7 Oct 2008 | 12:48 PM ET

Results of the Federal Reserve's weekly opening of its Term Auction Facility, the facility the Fed created last December to auction loans to depository institutions, were intriguing, indicating that for the first time since the facility was created fewer dollars were taken by banks than the Fed was offering.

Today's results were for yesterday's auction of $150 billion in loans. The results show that the bid/cover ratio was below 1.0 for the first time, at 0.92. Mind you, the amount of money taken, $138.09 billion, was the most ever, chiefly because the offering was the most ever (the previous largest offering was $75 billion), but what is new here is the idea that the Fed has finally arrived at a number by which we can judge just how much money banks need. This discovery process is something that has been ongoing for quite some time but will now speed up and be made clearer. (Crescenzi and Jim Bianco argue for the Fed to cut rates in the video)

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Backing up a bit, take note that when the Fed created the Term Auction Facility it did so by offering just $40 billion in loans. By May of this year, the facility grew to $150 billion in size. Importantly and to reiterate, all of the money the Fed offered was taken. Last Monday, the Fed increased the size of the TAF to $300 billion. Yesterday, the Fed catapulted the size of the TAF to $900 billion.

I stress that this blanket covering is likely to give us answers on just how much money banks need, whether it is $2 trillion or $200 billion. Results of yesterday's auction suggest the $900 billion is much more than necessary, but again here is the main point: We will at least have a handle on whether banks are getting the money they need and how much they need. This has been an open question all the while that the TAF was tapped out. Now that the TAF has been expanded we will discover how much is enough.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."

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