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The U.S. Federal Reserve Friday announced an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, starting with the auction on May 5. The action brings the amounts outstanding under the TAF to $150 billion, the Fed said.
In addition, the Fed also authorized further increases in its existing temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank. The arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the ECB and the SNB, respectively, representing increases of $20 billion and $6 billion. The Federal Open Market Committee (FOMC) extended the term of these reciprocal currency arrangements through January 30, 2009.
Furthermore, the Fed also authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers can now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial mortgage backed securities and agency collateralized mortgage obligations, beginning with the TSLF auction on May 7, 2008.
Economic Analysis: The move by the Fed increases the previously announced TAF and broadens collateral eligible under the TSLF. While unexpected, investors should keep in mind that the move probably was discussed weeks, if not months ago, and is consistent with the Fed's goal of keeping both major institutions and markets liquid and functioning. Hence, from a subprime default issue and overall U.S. economic recovery standpoint, the decision is neutral: i.e, one should not read into the announcement that 'mortgage/asset-backed defaults are likely to increase' in the months ahead.
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