Term Deposit Facility? Oh, now I get it
The Fed is going to sell CD's to banks as a new tool to drain liquidity. At first blush, I was planning to be sarcastic and derisive about this idea, but now I am beginning to understand the financial subtlety of it all (that can't be a good sign).
See, the Fed already has several traditional tools it can use to fight liquidity and inflation:
**stop propping up FRE and FNM securities and dump the MBS' it already has
**raise the reserve requirement
**jack up the Fed funds rate
problem is that all of these will raise the interest rates on mortgages, hurting the residential real estate recovery.
That is where this TDF comes in. There is $1T+ in free cash on deposit at the FED: its movement out into the financial system raises the specter of hyperinflation. So, the TDF promises to lock down this cash under the control of the FED, rather than under the individual banks' control. This is a new idea, and the question is: will it work as advertised? Will banks buy TDF's offering a paltry rate of return if they would really rather withdraw it and toss it back into their coffers?