The Fed's monetary policy toolbox |
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Toolbox 2: Providing liquidity to key credit markets
Asset-backed commercial paper money market
mutual fund liquidity facility, or AMLF: This is a lending
facility that provides funding to U.S. depository institutions and
bank holding companies to finance their purchases of high-quality
asset-backed commercial paper, or ABCP, from money market mutual
funds that hold such paper in meeting demands for redemptions by
investors and to foster liquidity in the ABCP market and money markets
more generally. (Announced Sept. 19, 2008)
Commercial paper funding facility, or CPFF: This is intended to provide a liquidity backstop
to U.S. issuers of commercial paper. The CPFF is intended to improve
liquidity in short-term funding markets and thereby contribute to
greater availability of credit for businesses and households. Under
the CPFF, the Federal Reserve Bank of New York will finance the
purchase of highly rated unsecured and asset-backed commercial paper
from eligible issuers via eligible primary dealers. (Announced Oct.
7, 2008)
Money market investor funding
facility, or MMIFF: This supports a private-sector initiative
designed to provide liquidity to U.S. money market investors. Under
the MMIFF, the New York Fed 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. (Announced Oct. 21, 2008)
Term asset-backed securities
loan facility, or TALF: This is a funding facility that will
help market participants meet the credit needs of households and
small businesses by supporting the issuance of asset-backed securities,
or ABS, collateralized by student loans, auto loans, credit card
loans and loans guaranteed by the Small Business Administration,
or SBA. Under the TALF, the Federal Reserve Bank of New York will
lend up to $200 billion on a nonrecourse basis to holders of certain
AAA-rated ABS backed by newly and recently originated consumer and
small business loans. The bank will lend an amount equal to the
market value of the ABS less a haircut* and will be secured at all
times by the ABS. (Announced Nov. 25, 2008)
"In contrast, the asset-backed securities program, a joint effort with the Treasury, is not purely for liquidity provision. This facility will provide three-year term loans to investors against AAA-rated securities backed by recently originated consumer and small-business loans. If the program works as planned, it should lead to lower rates and greater availability of consumer and small-business credit. Over time, by increasing market liquidity and stimulating market activity, this facility should also help to revive private lending."
Toolbox 3: Buying
long-term securities
The third set of policy rules involves the purchase of longer-term
securities such as the direct obligations of housing-related government-sponsored
enterprises -- Fannie Mae, Freddie Mac and the Federal Home Loan
Banks -- and mortgage-backed securities backed by Fannie Mae, Freddie
Mac and Ginnie Mae.
The Fed says that this action is being taken to reduce the cost and increase the availability of credit for the purchase of homes, which in turn should support housing markets and foster improved conditions in financial markets more generally. (Announced Nov. 25, 2008)
"We recently announced plans to purchase up to $100 billion in government-sponsored enterprise (GSE) debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation. Lower mortgage rates should support the housing sector."
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