Why was the Term Auction Facility created?

Question

Why was the Term Auction Facility created?

Answer 1

In view of the pressures evident in short-term funding markets, the Board of Governors

of the Federal Reserve System (the “Board”) has approved the establishment of a

temporary Term Auction Facility (“TAF”) program in which the Federal Reserve will

auction term funds to depository institutions.

The TAF is a credit facility that allows a depository institution to place a bid for an

advance from its local Federal Reserve Bank at an interest rate that is determined as the

result of an auction. By allowing the Federal Reserve to inject term funds through a

broader range of counterparties and against a broader range of collateral than open

market operations, this facility could help ensure that liquidity provisions can be

disseminated efficiently even when the unsecured interbank markets are under stress.