J.P.Morgan: Fed Brings Out Another Toolkit

J.P.Morgan write “while the terms of the BTFP are generous, truly funding-stressed institutions with good collateral already had several sources of reasonably priced access to Fed liquidity. So, it looks like instilling confidence and highlighting the Fed’s resolve are major aims of this program.”

• “At first glance, it may seem a bit incongruous that the Fed’s been laboring to tighten financial conditions, and then at the first hint of stress, it pulls out the stops to prevent that from metastasizing further. Appearances aside, we are sympathetic to the idea that this might be a good case of Bernanke’s dictum to “use the right tool for the job.” While the Fed wants tighter financial conditions to restrain aggregate demand, they don’t want that to occur in a non-linear fashion that can quickly spiral out of control, perhaps to the detriment of the taxpayer.”
• “And while they want credit to become more expensive, they shouldn’t want creditworthy borrowers to be shut out at any price. If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks—higher interest rates. So, we continue to look for a 25bp hike at next week’s meeting. Even before the problems flared up in the banking sector, we thought a 50bp move would be ill-advised, and we still think that is the case.”