tag:blogger.com,1999:blog-3782644139927778760.post-60843359010918193552007-12-13T08:11:00.000-05:002007-12-13T08:11:00.000-05:002007-12-13T08:11:00.000-05:00This facility is an extension of the discount window. It may be useful for year end precautionary reserve management by banks who want to avoid the 'stigma' of window borrowing. But its only a band-aid, and a weak one at that. The Fed is doing everything it can to avoid lowering the funds rate as a response to the credit problem. But using non-funds rate tools assumes implicitly that libor and commerical paper spreads are independent of the funds rate. This is questionable. Credit spreads are disproportionately high relative to the current level of the funds rate. They have a disproportionate monetary tightening effect relative to that rate. So monetary policy overall is too tight. The Fed will have to respond to credit spreads that have reversed much of the effect of funds easing to date - by easing the funds rate further. They made a mistake by not dropping 50 bp this time. The yield curve has been inverted too long at this stage and the inversion is also telegraphing that debt deflation rather than inflation is the greater threat.Anonymousnoreply@blogger.com