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Fed Second Rate Cut In Two Days

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by Felix Salmon
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Dec 12 2007 12:00am EDT

Fed: Second Rate Cut in Two Days

Greg Ip has the first best gloss on the Fed's liquidity-injection announcement:

The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window."...
The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. Since the federal funds rate is expected to decline over the next two months, when the loans will be outstanding, the loan rate could end up being close to or even below the current federal funds rate.

I'm sure that more details of the plan will emerge over the course of the day. But at first glance it seems as though the Fed has essentially cut its discount rate to a level at or below the Fed funds rate. After all, I can't see why anybody will now use the old discount window, when they can use this new TAF instead.

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