Fed Pumps Huge Wads of Cash Into System
In today's announcement, the Federal Reserve said that it would double the size of its Term Auction Facility to $300 billion from $150 billion, massively increasing its lifeline to commercial banks. The action should help put downward pressure on the fed funds rate, which is one of the reasons why the ability to pay interest on reserves is so important at this time.
The Fed also announced today that it would double the size of its swap facilities with foreign central banks to a whopping $620 billion from $290 billion, an action designed to counter strains in the European banking system, where demand for dollars is far outstripping supply.
The action will help lower LIBOR, which has been trading at 21-year highs relative to the fed funds rate (three-month LIBOR settled at 3.88% today).
Impact from the Fed's collective actions is apparent in eurodollar futures contracts, which are essentially bets on LIBOR. The implied yield on December eurodollar contracts, for example, has fallen 12 basis points since the Fed's announcement. Eurodollar contracts for June through December 2009 have seen 38-basis-point declines on the day (partly in response to the government's bailout plan).
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