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short essays and reports on the economic issues of the day
2008 ■ Number 10

New Monetary Policy Tools?
Riccardo DiCecio and Charles S. Gascon


The PDCF accepts a broader range of securities than the TSLF
ince the summer of 2007, financial market turmoil has
and is a “cash-for-bond” form of lending. As mentioned, to
increased the demand for riskless, liquid assets and dried
prevent PDCF operations from increasing the monetary base,
up liquidity in key markets. Market-determined shortthe Fed offsets the increase with a sale of Treasury securities.
term interest rates, normally close to the federal funds rate,
In short, the differences in these instruments are types of
have risen sharply. The bid-ask interest rate spread—the differacceptable collateral, duration of the loan, which financial
ence between what lenders will charge and buyers will pay—
institutions have access, and the cost to the borrower. All these
has widened. In short, financial institutions have found it
actions distribute liquidity to the segments of the financial
increasingly difficult to borrow money against collateral.
markets facing shortages; but, because they merely change
The Federal Reserve has intervened repeatedly to ease liqthe composition of the Fed’s assets, they do not increase the
uidity pressures in financial markets. In a sequence of developmonetary base.
ments beginning in December 2007, the Fed introduced three
On the other hand, this re-allocation of assets may reduce
new policy instruments: the Term Auction Facility (TAF), the
banks’ demand for excess reserves, and thereby encourage
Term Securities Lending Facility (TSLF), and the Primary
banks to lend more; this would effectively increase the broader
Dealer Credit Facility (PDCF).
monetary aggregates that include deposits without changing
The TAF is a credit facility that allows depository instituthe monetary base. Therefore, these instruments may indeed
tions (e.g., commercial banks) to borrow from the Fed for 28
be tools of monetary policy. ■
days against a wide variety of collateral.1 For the period of the
1 For more details, see David C. Wheelock, “Another Window: The Term Auction
loan, this action increases the Fed’s assets and liabilities by the
Facility,” Federal Reserve Bank of St. Louis Monetary Trends, March 2008.
same amount. (See the examples in black in the table’s second
2 See Federal Reserve Bank of St. Louis Monetary Trends, May 2008, p. 19, for
column.) These actions, though, would have the secondary
definitions of monetary aggregates.
effect of increasing bank reserves and ulti2
mately also the monetary base. In general,
the Fed conducts open market operations
A Hypothetical Federal Reserve Balance Sheet
(OMOs) to counteract unwanted increases
(or decreases) in the monetary base; in this
case, it has sold Treasury securities to exactly
Treasury securities
+1 bil
–1 bil
–1 bil
–1 bil
offset this increase. (See the examples in blue
Repos (net of reverse repos)
in the table’s second column.)
TAF credit
+1 bil
The TSLF permits primary dealers to
Discount window credit
borrow Treasury securities against other
+1 bil
securities as collateral for 28 days. The range
Other assets
+1 bil
of securities that can be used as collateral is
Total assets
+1 bil
wider than for the TAF. For example, it
+1 bil
+1 bil
+1 bil
includes some mortgage-backed securities.
–1 bil
The TSLF is a “bond-for-bond” form of
Total liabilities
+1 bil
lending and it affects only the composition
of the Fed’s assets without increasing total
NOTE: *The Fed uses open market operations as its standard tool for implementing monetary
policy: The first column shows the Fed purchasing $1 billion in Treasuries and thus increasing
The PDCF is an overnight loan facility
the monetary base by the same amount.
that provides funding for up to 120 days to
primary dealers in exchange for collateral.
Views expressed do not necessarily reflect official positions of the Federal Reserve System.