Fed Policy: The Fed Steps In to Support Consumers Directly – Northern Trust

On November 25, 2008, the Fed stepped in with reinforcements for consumers directly. This is a noteworthy action because over the past sixteen months Fed intervention has been directed to support financial institutions and the workings of the financial system. The Fed announced two programs amounting to new assistance of $800 billion. (1).

On November 25, 2008, the Fed stepped in with reinforcements for consumers directly. This is a noteworthy action because over the past sixteen months Fed intervention has been directed to support financial institutions and the workings of the financial system. The Fed announced two programs amounting to new assistance of $800 billion. (1). The Term Asset-Backed Securities Loan Facility (TALF) is a joint program with the Treasury. The program that will involve the Federal Reserve Bank of New York lending up to $200 billion to holders of AAA-rated asset backed securities “backed by newly and recently originated consumer and small business loans.” The U.S. Treasury Department, under the Emergency Economic Stabilization Act of 2008, will absorb $20 billion of losses and provide credit protection to the Federal Reserve Bank of New York for these non-recourse loans. The loans will involve a haircut based on the asset class and there is fee for participation. This new program is designed to address problems in the auto, student, credit card sectors, and loans guaranteed by the Small Business Administration. Loans to consumers have become scarce because securitization of consumer loans has come to a standstill. Extensions of loans to holders of these securities will enable the credit machine to resume working once again and enhance the availability of credit for households. A date and details are being worked out. One of the drawbacks of this program is that only AAA-rated securities are deemed eligible. It is entirely possible that soon a wider range of securities will be considered suitable for loans under this program. Treasury Secretary Paulson indicated that this is a “starting point” and it could be expanded to include other securities. (2). The Fed also announced it will start purchasing securities issued by Government Sponsored Enterprises (GSE) – Fannie Mae, Freddie Mac, and Federal Home Loan Banks – this week. Purchases of $100 billion in GSE direct obligations and $500 billion of mortgage backed securities backed by GSEs will be undertaken under this program. Spreads of these securities vis-à-vis Treasury securities had widened sharply (see chart 1) in recent days but then narrowed after this announcement. The objective of this action is to drive down mortgage rates and increase the availability of credit for purchases of homes. Reportedly, a reduction in mortgage rates occurred after this announcement.

 

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