The result of the Federal Reserve’s serial market interventions is that they are now competing with the private sector (via Bloomberg):
“No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks,” said Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London. “In effect, the measures taken by central banks are not providing incentives to go into the interbank market.”
As I have said repeatedly, the Fed IS the problem now. They are lending in the interbank market because the banks will not lend at the artificially low rate provided by the Fed. There is a very simple reason for that; the banks want a premium to account for the risk of lending to banks with opaque balance sheets. And who created that problem? The Fed of course. The TAF allows banks to borrow from The Fed anonymously using dodgy collateral which allows the bad banks to remain hidden from view. The TSLF provides the same function for investment banks or at least the few that are left.
So the Fed helped to create a problem and in attempting to solve that problem they have now created another one. I’m not sure how the Fed will ever extract themselves from the market when they are the market. If the Fed backs out, banks will lend but at a higher rate. If the Fed stays the banks won’t lend. The solution would seem obvious.