Despite signs the economy is recovering, the Federal Reserve Board announced Thursday it would keep several liquidity facilities in place into early 2010, while allowing other programs to expire.

The central bank said that four programs — the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility — would be extended through Feb. 1. All four had been slated to expire Oct. 30.

Still, the Fed also began the process of gradually unwinding several facilities. As liquidity flows begin to stabilize, the Fed said, it will scale back some efforts it began last year when institutions were struggling. The Fed did not change the expiration date for the Term Asset-Backed Securities Loan Facility (TALF), which was set up to provide liquidity for consumer lending. Once considered a centerpiece of the central bank's efforts to help the markets, TALF, which is due to expire Dec. 31, has generated only limited interest from investors.

The Fed will also reduce biweekly offerings through the Term Auction Facility — which provides liquidity to depository institutions — to $125 billion, from $150 billion, and it will suspend or reduce components of the TSLF, which lets investors bid on government and private-sector debt.
"The Federal Reserve anticipates that, if market conditions continue to improve in coming months, TAF funding will be reduced gradually further," the central bank said in a press release.
(The TAF does not have a designated expiration date.)

The release marked the first public Fed efforts at crafting an exist strategy for its many programs.

The Fed said activity through the TSLF "has fallen notably." As a result, certain auctions backed by Treasury collateral and agency debt — known as "Schedule 1" auctions — will be suspended July 1. The central bank also said it would reduce the frequency of other types of auctions — using municipal and asset-backed securities — that are run through the TSLF. These "Schedule 2" auctions, which have offered $75 billion twice a month, will be scaled back to once a month.
The Fed is allowing expiration of some other programs that have failed to generate interest. For example, the central bank said it would let the Money Market Investor Funding Facility, originally aimed at helping money-market mutual funds, end on Oct. 30. The MMIFF was never tapped, according to senior Fed officials.

But in other cases, the central bank decided to extend programs that had seen limited use. This was true for its primary dealer facility.

"The board believes it appropriate to continue to provide the PDCF as a backstop liquidity facility," the Fed said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.