Tuesday, October 7, 2008

The Fed Gets Involved: Commercial Paper

The Commercial Paper Market

The Fed came in this morning and said that they would create a facility which would buy short-term, high quality and unsecured highly rated debt in a step which will hopefully grease some of the wheels in this critically important market that has has been stagnant.

Liquidity and Volatility Indicators

As an indication of the fact that the market s like this move, the TED Spread has narrowed to as low as 3.29 and is now at 3.46. Still high, but an improvement in this indicator of credit market liquidity.

Another interesting point is that the VIX, while still high at 49.51, is down 2.54 in the face of the stock market being down 200. This would indicate an easing in volatility, also a positive sign.

The Fed Speaks

Finally, Federal Reserve Chief Bernanke signaled in a speech that the Fed is ready to potentially lower rates in response to the weakness in our economy, and stray away from the focus that they have had on fighting inflation.

"Continued efforts to stabilize the financial markets are essential," he said. "The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity," he added.

While as always these moves are not a panacea, they are without question a positive first step in what are no doubt going to be many steps.

Now if we could only get the EU to follow along.

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