The Federal Reserve is engaged in an ongoing assessment of the effectiveness of its credit-related tools. Measuring the impact of our programs is complicated by the fact that multiple factors affect market conditions. Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts. Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets. For example, we believe that the aggressive liquidity provision by the Fed and other central banks has contributed to the recent declines in Libor and is a principal reason that liquidity pressures around the end of the year--often a period of heightened liquidity strains--were relatively modest. There is widespread agreement that our commercial paper funding facility has helped to stabilize the commercial paper market, lowering rates significantly and allowing firms access to financing at terms longer than a few days. Together with other government programs, our actions to stabilize the money market mutual fund industry have also shown some measure of success, as the sharp withdrawals from funds seen in September have given way to modest inflows. And our purchases of agency debt and MBS seem to have had a significant effect on conforming mortgage rates, with rates on 30-year fixed-rate mortgages falling close to a percentage point since the announcement of the program. All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened.
From today's WSJ:
Analysts say rock-bottom official interest rates, promises of massive fiscal-stimulus packages and central banks' other efforts to revive markets have helped ease some tensions in financial markets and may help put a floor under falling business confidence. As the government rescue efforts work their way through the markets, they could lay the groundwork for the global economy to begin escaping the worst of the storm.
A key barometer for financial-sector health -- the London interbank offered rate -- soared in the fall after Lehman Brothers Holdings Inc. filed for bankruptcy, because banks quit lending to one another. On Wednesday, the three-month dollar Libor inched up to 1.23% on disappointment about the Treasury Department's financial-stability plan, but has been easing since the start of the year and is down sharply since its peak of 4.82% on Oct. 10.
Also in financial markets, issuance of high-rated corporate bonds is soaring, signaling that markets could be getting back on track to serving their core purpose -- providing funds to firms that need them.
Short-term corporate credit markets also have shown signs of improvement. Interest rates on short-term commercial-paper financing agreements have come down, and firms have become less reliant on a special Federal Reserve facility serving commercial-paper borrowers.
Since the start of the year, companies world-wide have sold $264.4 billion of investment-grade corporate bonds that aren't guaranteed through a government program, according to research firm Dealogic. That is up from the fourth quarter of last year, when companies sold on average $82.9 billion of non-government-backed debt a month.
That article then notes these readings are coming from very low levels. One analyst notes, "things are simply less bad", which is an incredibly salient point. But as Bernanke notes, things are stabilizing (or at least seem to be).