Fed Statement Sheds Some Light On Exit Strategy
The Federal Reserve Open Market Committee just released the statement from its December meeting, and there's little news to report. As expected, Fed economists believe the economy is showing some signs of improvement. They also continue to anticipate leaving interest rates very low for a very long time. They're still not worried about inflation. But there's a little bit of explanation about the future of the many emergency credit facilities the Fed put into place during the financial crisis. They're mostly going away in the first half of next year.
We already knew that the Fed was planning on no longer purchasing mortgage-backed securities after Q1 2010, and the statement reaffirmed that. But it gave additional information regarding many of its other programs, which it will allow to expire by February 1, 2010:
These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility.
It will also close its temporary liquidity swap arrangements at that time. But perhaps the most significant news is:
The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral.
Of course, the Fed noted that all of these plans are subject to change if market conditions worsen.
I'm a bit surprised that the Fed is so eager to close TALF, in particular. To my knowledge the securitization market is hardly business as usual again. I noted earlier this month that the first non-TALF commercial mortgage-backed securities deal of the year succeeded, but it appears to have been challenging. So will the entire securitization market really have improved by the end of June so that the Fed can take off the training wheels entirely?
Without securitization, consumer credit will have a hard time recovering. But, as I've said before, banks could be intentionally taking advantage of the Fed's program, rather than going to investors instead. Yet, I find it a little hard to believe that banks would ignore investor demand if there's much out there. Whatever the case, it should be interesting to watch the first half of 2010 to see if markets really do return to business as usual without the Fed's programs.