The latest effort to alleviate the effects of the ongoing credit crunch by the U.S. Federal Reserve Board is a step in the right direction, but more will need to be done, says National Bank Financial.

In a research note, NBF comments on the Fed’s announcement that it is introducing a new term securities lending facility intended to promote liquidity in financial markets.

NBF notes that the Fed has taken a variety of actions to try and support market liquidity, including providing liquidity through open market operations, encouraging institutions to use the discount window, and, in December, introducing a new policy tool, the Term Auction Facility.

“Market responses to this new source of liquidity has been positive and allowed some relief going into 2008. However, with mounting evidence of an economic slowdown in the United States amid ongoing de-leveraging in global financial sectors, the situation has been deteriorating lately,” it says. “Safe-haven flows from risky assets to government bonds contributed in pushing 2-year yield as low as 1.40% late last week while market participants were speculating about the need for an inter-meeting rate cut by the Fed.”

“In an environment where high energy and food prices threaten to unmoor inflationary expectations, the Fed decided to add liquidity to the Treasury market by extending its securities lending program,” it says, explaining that under its new Term Securities Lending Facility the Fed will lend up to US$200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program).

It reports that, in response to today’s action by the Fed, yield on 2-year notes moved back to 1.72%, while July fed funds future moved from 1.75% to 1.97%.

“As we mentioned in the past, the roots of the current financial market disruptions lies with some bad lending practices, the lack of disclosure and resulting mistrust between market participants. To solve this mess, unconventional policy tools will be needed rather than Fed’s rate cuts alone,” NBF concludes. “Today’s announcement by the Fed is one further steep along that path way. Still more will have to be done in order to reduce the crowding out effect of financial institutions borrowing needs on non-financial borrowers.”