Michael Meehan 8-May-09 [email protected] [email protected]
Federal Reserve and the Financial Crisis
Profile of Federal Reserve
Established under the Federal Reserve Act the system was established in 1913
Today, the Federal Reserve’s duties fall into four general areas: • Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employ- ment, stable prices, and moderate long-term interest rates • Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • Providing financial services to depository institutions, the U.S. gov- ernment, and foreign official institutions, including playing a major role in operating the nation’s payments system [check clearing]
Source: The Federal Reserve System: Purposes and Functions, Ninth Edition, June 2005 Library of Congress Control Number 39026719
Within Monetary Policy the Fed has legally two objectives.
- Maintain low unemployment - Maintain low inflation
Neither of these two objectives has a specific target. There is no explicit interest rate target although many economists consider an implicit rate of 2% (the same as the explicit target of the ECB) to be the Fed’s target. Additionally, many observers of Fed-Speak maintain that the Fed has defined a 3rd and separate objective: steady and sustainable growth.
Board of Governors – 7 members appointed by the president, authority over the discount rate
Federal Open Market Committee (FOMC)- sets the Fed Funds Rate voting members, the board of governors plus 5 Reserve Bank Presidents. The New York Fed President is given permanent voting rights- NYFed carries out OMO. All Fed Presidents sit on the board.
12 Reserve Banks- 12 reserve banks across the US execute the regulatory, supervisory, and payment services of the Fed.
Tools for Monetary Policy
Traditional Tools:
• Open Market Operations (OMO) Fed Funds Rate (0-0.25%) • Discount Lending Window (a higher %, don’t let the name fool you) (0.50%) • Reserve Requirement (10%)
Link to Fed Funds Chart and Excel export option: http://www.newyorkfed.org/charts/ff/
New Tools & Lending Programs
Term Discount Window Program (17.8.07) • Reduce the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points (from 100)
Term Auction Facility (12.12.2007) • Auction term funds to depository institutions. • All depository institutions that are eligible to borrow under the primary credit program eligible • All advances must be fully collateralized • TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate)
Single Tranche OMO (7.3.2008)
• $100 Billion • Allows more flexibility in lending by eliminating differentiation among collateral classes • Conventional Repos: 3 collateral “tranches.” 1- Treasuries 2- federal agency debt & Treasuries 3- mortgage-backed securities issued or fully guaranteed by federal agencies & federal agency debt or Treasuries. • “Single-tranche” RPs: dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities.
Term Securities Lending Facility (compare to securities lending program) 11.3.2008 • Expanding type of debt acceptable as collateral • $200 Billion • Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank • 28 days (rather than overnight, as in the existing program the TAF?) • pledge of federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. • The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. • Auctions will be held on a weekly basis, beginning on March 27, 2008.
Primary Dealer Credit Facility 16.3.2008
• Basically an overnight lending market for Primary Dealers • The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally. • frequency-based fee charged to dealers who access the facility on more than 45 business days. Access to the facility on the 46th and subsequent days will result in additional fees to be paid by the dealer. • The rate paid on the loan will be the same as the primary credit rate at the New York Fed. ( currently 0.5%)
Term Securities Lending Facility Options Program 7.30.2008 • Grease the rough patches • Offer options to primary dealers to draw new supply of short-dated TSLF loans that span key periods of heightened collateral market pressures, such as quarter- end dates. • Auction the right to borrow at a fixed rate • The Desk will offer a total of $50 billion in options for each targeted period. The Desk may conduct one or more TOP auctions per period.
ABCP Money Market Fund Liquidity Facility – 9.19.2008 • Almost like preventing a run on a MMMF • MMMF had significant demands for redemptions by investors. • Normal: meet demands by selling assets. • Illiquidity, including ABCP markets. • Restore liquidity to the ABCP markets and thereby to help money funds meet demands for redemption. • MMMF borrows from window to buy commercial paper which they can use to remain liquid while paying back investors
Transitional Credit Extensions (to Goldman, Morgan, and Merrill) 9.21.2008 • Goldman and Morgan transition to Bank Holding companies • Authorized providing liquidity to broker- dealer subsidiaries in USA and London. • Merril Lynch included in authorization
Commercial Paper Funding Facility 10.7.08 • Direct purchases of Commercial Paper • (SPV) that will purchase eligible three-month unsecured and asset-backed commercial paper for 3 month periods • “Borrower of last resort” That issuers couldn’t place funds, and at short terms, the fed buying 3 month loans provides them with proceeds of purchase, which they can use to lend to businesses
Money Market Investor Funding Facility 10.21.2008
Great example of Fed Speak Under the MMIFF, authorized by the Board under section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. –Not a single concrete person, asset or thing mentioned.
• By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their
Term Asset Backed Securities Loan Facility 11.25.08
• ABS funds consumer and business credit Æ consumption • October 2008 this market all but ground to a halt • Facilitate the issuance of ABS • Lend up to $200 Billion • $20 Billion from TARP • Purchase newly and recently issued AAA ABS as a secondary market participant. • Encourage Lending a) provide assurance of a buyer b) liquidity from proceeds of purchase • Influence the terms under which ABS are issued through market activity
Maiden Lane I - Fed Rescue of Bear Sterns
Maiden Lane II - Fed Action in conjunction with Treasury Dept. in regards to American International Group. (AIG) Link to all “Maiden Lane Operations” http://www.newyorkfed.org/markets/maidenlane.html
The Treasury & TARP - some rather unsatisfactory information - http://www.federalreserve.gov/bankinforeg/tarpinfo.htm - testimony from Donald Kohn, Governor - http://www.federalreserve.gov/newsevents/testimony/kohn20090113a.ht m