Friday, April 26, 2013

Another Bazooka...

..."just in case we need it"...

Incentivizing term deposits at the Fed is an interesting policy tool, but it should be used with caution as rates respond negatively to liquidity events.  Its also a given that the Fed "should" never let money center banks use this tool in size as it will inevitably force the Fed's hand (with respect to "early withdrawal penalties") to return the funds as quickly as possible with zero penalty.

Unlike mere mortals, the Money Center banks can make a couple of phone calls to D.C. and explain that levying a penalty during market stresses ("we really need our term deposit funds back") only exacerbates the problem.

The Federal Reserve plans to conduct fixed-rate offerings of term deposits with full allotment of tenders under the Term Deposit Facility (TDF) as part of the ongoing program of small-value offerings announced on September 8, 2010. The Board had previously announced that it would consider various formats for the TDF as part of the development of the facility.

These small-value operations are designed to ensure the operational readiness of the TDF and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures. The development of the TDF and the ongoing small-value TDF operations are a matter of prudent planning and have no implications for the near-term conduct of monetary policy.

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