The development of the Term Deposit Facility is an issue of prudent planning and should have implications for the near-term conduct of monetary policy.
Certificates of deposit and short-term Treasury bills are plenty safe but do little more than keep up with inflation long term.
On a side note: It is my hope that the Federal Reserve could find a way to use the funds received from the Term-Deposit facility program and re-purpose them through a different transmission mechanism that reaches the broader economy.
Money market funds and cash equivalents (short-term certificates of deposit, T-bills) will yield below 1.0 percent for several more years, thereby generating a negative real return.
Regulators want to encourage more long-term funding and deposit-taking.
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The Fed has tried to pump money into the banking system to break the log jam, first by opening up its discount window to deposit banks and then by inventing a new term auction program for them.
Then, they need to prove that they can tap into long-term credit markets without leaning on the Federal Deposit Insurance Corp. to guarantee their debt.
The term should be restricted to that part of the deposit where production planning is taking place and for which any variation in the estimate would not significantly affect potential economic viability.
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The university this week launched a new safe taxi scheme, which allows students who do not have enough money to get home from nights out during term time to use their matriculation card and signature as a deposit for the fare.
They are typically short-term investments that banks market as a high-yield alternative to bank deposit rates, which are kept low by the government.
Forcing banks back to the short-term debt markets for funding (or even to rely on their own deposit taking operations) is another baby step to getting the banks out of the emergency safety net.
However, when central banks pay interest on reserves or a deposit facility, this interest rate is rarely the one used to set the target for short-term private sector borrowing rates.
Many of us have short-term financial goals, like saving for a significant vacation in three years, or putting a deposit on a home in the next two years.
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