As the Bank of Canada did earlier this week, the U.S. Federal Reserve announced plans to begin scaling back some of the extraordinary liquidity programs it introduced to fight the global financial crisis.

The Federal Reserve announced the schedules for operations under the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF) through January 2010, noting that these schedules are consistent with the Fed’s previously announced intention ‘to gradually scale back these facilities in response to continued improvements in financial market conditions’. However, the schedules ‘also take account of the possibility that market pressures could be heightened over year-end.’

The Fed has reduced the amounts offered under the TAF from a peak of US$150 billion per auction to US$75 billion per auction as conditions in short-term funding markets have continued to improve. For 28-day auctions, it will continue to offer US$75 billion per auction through January in order to ensure that an adequate volume of funding is available in the period leading up to year-end, but reductions in the sizes of those operations are expected to resume early next year.

The amounts offered under the existing cycle of auctions of 84-day funds will be reduced to US$50 billion effective in October and to US$25 billion in November and December, and the maturities of those operations will be reduced. The purpose of shortening the maturities is to align the maturity dates of those operations with the maturities in the cycle for 28-day funds, the Fed explains. Early next year, the auction schedule will be converted to a single cycle of 28-day funds.

‘Over the next several months, the Federal Reserve will assess whether to maintain a TAF on a permanent basis and will publish a request for public comment on a range of possible structures for a permanent TAF,’ it says.

Due to recent further improvements in conditions in secured financing markets, the amounts offered in TSLF auctions will also be scaled back further from their current size of US$75 billion, the Fed said. TSLF offerings will be reduced to US$50 billion in the October auction and to US$25 billion in the November, December, and January auctions in the current 28-day cycle of auctions.

The Fed adds that it remains ‘prepared to expand its liquidity operations more generally should financial market conditions deteriorate materially’.

IE