The Fed’s Thaw

Source: Allan Sloan, Washington Post

The Federal Reserve Board's clout isn't what it was during Alan Greenspan's glory days. Back then, the Fed looked and acted all-powerful (even though it wasn't). Now it's visibly failing to unfreeze key debt markets in which giant institutions lend to each other. Those markets have frozen out of fear: No one knows what hidden time bombs are on other firms' balance sheets, or even on their own. The Fed hasn't been able to thaw the markets with interest rate cuts or by using its discount window, through which it lends directly to institutions, and it has been reduced to trying to bribe and cajole big players into borrowing its money as a substitute for borrowing from each other. It's not clear whether its recently created "term auction facility," designed to induce institutions to borrow from the Fed, will unfreeze things. The first two auctions were a blowout success. The Fed said it got about $3 in bids for each $1 offered, but I suspect that's because the auctions were for a relatively small $20 billion each and because the Fed and its allies jawboned institutions to bid. Am I really saying that the Fed, which to many people still seems omniscient and omnipotent, has lost much of its mojo? I am.

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