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Farrell: Looking Beyond Symbol Of Rate Cut

The Fed and Central Banks around the world cut interest rates.Beyond the symbolic, the practical effect is that borrowing costs go down and can be lent at higher rates so the "yield curve" is steeper and that could improve bank profitability. This is another in the string of actions taken by the Fed to improve liquidity.

Yesterday's move to buy commercial paper directly is designed to thaw the credit markets. Ordinarily, about 40% of commercial paper is 1-4 days in maturity. It is now almost 80% and that is no way to finance a business. The Fed's offer covers most issuers and is up to 90 days in maturity which helps a business plan its finances.

Yesterdays auction conducted under the Term Auction Facility -TAF- saw $139 billion of the $150 billion offered subscribed for. This is the first time the auction was undersubscribed. It was the largest auction- they started at $40 billion originally- and it can be seen as a sign as to how much money the system needs. This facility goes to $900 billion by the end of the year and if one weeks auction is indicative, the $900 might be more than enough.

Barney Frank and Ben Bernanke have both indicated that the rescue plan agreed to by Congress--the Troubled Asset Relief Plan or TARP--can be used to make direct investments into financial institutions. In addition to buying the troubled loans, this might be the best action to reliquify the banking system. The other move left would be for the Fed to guarantee interbank transactions. These might be necessary steps to end the crisis.

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