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November/December 2011, 
Vol. 93, No. 6
Posted 2011-11-01

The Effectiveness of Unconventional Monetary Policy: The Term Auction Facility

This paper investigates the effectiveness of one of the Federal Reserve’s unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between the London interbank offered rate (LIBOR) rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announce-ment by the Fed and other central banks as a sign that the financial crisis was worse than previ-ously thought. Evidence is presented that supports this hypothesis.

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