Term Auction Facility

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Overview

Main page Federal Reserve System

The Term Auction Facility (TAF) is a temporary program managed by the United States Federal Reserve designed to "address elevated pressures in short-term funding markets".[1]

Under the program the Fed auctions collateralized loans with terms of 28 and 84 days to depository institutions that are "in generally sound financial condition" and "are expected to remain so over the terms of TAF loans."

Eligible collateral is the same as that accepted for discount window loans and includes a wide range of financial assets.[2]

The program was instituted in December 2007 in response to problems associated with the subprime mortgage crisis and was motivated by a desire to address a widening spread between interest rates on overnight and term (longer than overnight) interbank lending, indicating a retreat from risk-taking by banks.[3][4][5]

The action was in coordination with simultaneous and similar initiatives undertaken by the Bank of Canada,[6] the Bank of England,[7] the European Central Bank[8] and the Swiss National Bank.[9]

Fed reduces TAF auctions in September to $75 billion

Source: Fed Reduces TAF Auctions in September to $75 Billion Bloomberg, August 28, 2009

"The Federal Reserve will reduce the size of two auctions of cash to banks to $75 billion each in September from $100 billion this month in a sign of waning demand for the emergency loan program.

The Fed will offer $75 billion of 84-day credit on Sept. 8 and $75 billion of 28-day credit on Sept. 21, the New York Fed said today in a statement on its Web site. Biweekly Term Auction Facility auctions were reduced to $125 billion in July from $150 billion and cut to $100 billion in August.

The central bank created the so-called TAF to provide cash to banks after interest-rate cuts failed to boost lending and lower borrowing costs. The program, one of the first of the Fed’s responses to the credit crisis, is partly intended to enable banks to avoid the stigma of directly borrowing from the central bank’s discount window.

“The cutback to $75 billion isn’t going to be a constraint on the market,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “The more interesting question is what they’ll do in October. A further $25 billion reduction, to $50 billion, might bring the auction size below the level of market demand, which would turn the TAF auction into a competitive one for the first time since last summer.”

Fed officials said in a statement earlier this month that the economy is “leveling out” and predicted “a gradual resumption to sustainable” growth. James Bullard, president of the St. Louis Fed, said yesterday that he’s optimistic the worst of the economic crisis is over and that the central bank’s liquidity programs will wane.

Loans Outstanding

Loans outstanding under the TAF, which began in December 2007, stood at $221.1 billion as of Aug. 26. Bids for the Aug. 24 TAF auction totaled $73.4 billion, down from $142.4 billion in February.

The Fed’s aid programs have helped unclog some credit markets. The London interbank offered rate, the interest banks charge to lend to each other, fell to a record 34.75 basis points today, from 482 basis points in October, after Lehman Brothers Holdings Inc.’s collapse caused money markets to freeze up. A basis point is 0.01 percentage point.

Brian Madigan, a top adviser to Fed Chairman Ben S. Bernanke, said last week that the central bank may need to make TAF permanent as part of a policy to ensure emergency loan programs are in place for future crises.

Policy makers “should consider whether” TAF and similar programs “need to be adapted and made permanent, or new facilities established,” Madigan, director of the Fed’s Division of Monetary Affairs, said Aug. 21 in a speech at Jackson Hole, Wyoming.

Policy makers said earlier this month that the Fed will end its purchases of $300 billion of U.S. Treasuries in October."

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