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).


Where will the Dow Jones Industrial Average stand at the end of 2008?

Above 10,000
9000-10,000
8000-9000
7000 to 8000
Below 7000
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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