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For immediate release: May 6, 2010

Fed’s Term Auction Facility Effective During Financial Crisis, Says Dallas Fed’s Economic Letter

DALLAS—The Federal Reserve’s Term Auction Facility proved effective in addressing severe financial turbulence, according to the latest issue of the Federal Reserve Bank of Dallas’ Economic Letter.

In “The Term Auction Facility’s Effectiveness in the Financial Crisis of 2007–09,” senior economist and advisor Tao Wu finds the Fed’s Term Auction Facility (TAF) reduced liquidity risk premiums paid by banks but was less effective in cutting counterparty risk premiums.

The presence of the TAF lowered the three-month Libor–OIS spread by 50 or 55 basis points during the crisis of 2007–09, according to Wu’s estimates.

“The TAF and other lending facilities established during the crisis were an experiment that proved effective in addressing severe financial turbulence, and similar facilities can be a useful part of the Federal Reserve’s tool kit in the event of future crises,” Wu writes.


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