The market, it seems, was still digesting the potential repercussions of “operation drano“on Tuesday.
What we know is that, starting tomorrow at 11.30am in Washington, the US treasury will conduct weekly auctions of $25bn in 56-day bills as part of the so-called Supplementary Financing Program.
The SFP was introduced just over a year ago to give the Fed more flexibility in managing the crisis, but in September a decision was made to keep the facility below $15bn for fear of breaching the Federal debt ceiling. Now that the ceiling has been raised to $14,300bn, the SFP can be used to both drain excess liquidity from the banking system and also to apply a slight upward bias to interest rates.
But the policy is not without its critics, including…er… one Ben Bernanke. From a BarCap note back in September, mulling over possible Fed exit strategies:
Chairman Bernanke expressed some reservations about the program: first because the capacity is limited by the Treasury’s ability (and willingness) to borrow under the debt ceiling and second, because central bank independence might be compromised by relying too heavily on the Treasury to help implement monetary policy.
Which means it will involve a high degree of teamwork between the US Treasury and the Federal Reserve to work:
Related links:
Treasury to Raise SFP to $200 Billion Over Two Months - Bloomberg
Did the discount rate hike leak? – FT Alphaville
Bargaining Tier 1 – FT Alphaville
The Drano Blog