Markets certainly approved of today’s efforts by the U.S. Federal Reserve Board to improve liquidity, but analysts are divided on their effectiveness.

The Fed announced a substantial expansion of its securities lending program, under which it will lend up to US$200 billion of Treasury securities to primary dealers secured for a term of 28 days.

Global Insight explains that the measure is intended to promote liquidity in the financing markets for Treasury and other collateral, and thus to foster the functioning of financial markets more generally. It says that the Fed’s latest action represents a full-scale assault on the negative feedback loops that have developed in the markets.

Fitch Ratings says it is encouraged by today’s announcement, and it believes the measure has potential positive implications for U.S. financial institutions. “Counterparty unwillingness and liquidity preservation have undermined the fluidity in the U.S. markets for highly liquid collateral. Fitch believes the broadening of acceptable collateral by the Fed, particularly for mortgage-backed securities, should relieve some of the recent market pressures,” it notes.

“Improvement in liquidity is expected in the near term although Fitch realizes that sales and financings may not be immediate with limited appetite for balance sheet growth in advance of the end of the first quarter,” it adds.

However, Merrill Lynch is more skeptical. It maintains that, “As with the other liquidity measures introduced, the new facility will not alleviate the current credit crunch or economic recession, in our view. The size of the auctions, while sizable in terms of the Fed’s balance sheet, are actually fairly small in light of the overall credit situation and in no way does this solve — or is intended to solve — the massive writedowns and losses in the banking sector that are ongoing in this cycle.”