The Fed’s new Term Auction Facility has forced modest improvements in interbank lending rates, but it remains plainly clear that conditions remain tight across relevant credit markets. Indeed, a rise in Credit Default Swaps underlines risk aversion as the main driver of illiquidity in corporate lending markets. Given overall fears of credit defaults, investors are unwilling to lend to corporate institutions. Credit conditions are likely to remain tight in the absence of a clear shift in sentiment, and there is seemingly little that the Federal Reserve can do to ameliorate market stress.
- Federal Reserve’s Term Auction Facility successful in lowering interbank lending rates, but credit conditions remain poor
- A modest improvement in sentiment allowed for a Dow Jones rally, but markets clearly remain very risk-averse
- The Federal Reserve may have a difficult time improving conditions in the absence of a clear shift in lending sentiment
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