Oh I See, from George Zachar

December 13, 2007 |

The Fed's upcoming liquidity swaps will be keyed off the OIS rate for one month funds, which I mistakenly assumed was roughly the rate for a term loan of the duration.

I have since learned that the OIS is effectively the same as the rate on the second Fed Funds future, which is currently ~4.20%, a modest discount from the spot target rate of 4.25% and substantially lower than the 4.75% discount rate.

This makes the upcoming set of auctions a one-off discount rate cut, albeit in relatively small size. The two day window between bid submission and auction award announcements further muddies the program's value.

Alex Castaldo remarks:

I have the impression that the Fed is experimenting with a view to a permanent auction mechanism for supplying liquidity, based on this paragraph in the news release:

Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools–open market operations and the primary credit facility–with a permanent facility for auctioning term discount window credit.

This mechanism would be similar to the weekly auctions that the ECB holds (the so called main refinancing operations). From ECB web site:

Main refinancing operations are regular liquidity-providing reverse transactions with a frequency and maturity of one week. They are executed by the [National Central Banks of the Eurosystem] on the basis of standard tenders and according to a pre-specified [weekly] calendar. The main refinancing operations play a pivotal role in fulfilling the aims of the Eurosystem's open market operations and provide the bulk of refinancing to the financial sector.

European fashions in Central Banking coming to the U.S. ? We shall see.


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