However, changes in the stance of monetary policy must not be viewed as an immediate reaction of monetary policy to the financial market crisis, but rather as a reaction to the expected effects of that crisis on economic growth and on inflation. This view also explains the apparent hesitation of some central banks to lower rates, in spite of the serious financial market turmoil. The precise way in which the financial market crisis will affect economic growth and inflation has not been obvious – and is still not obvious. Operational target and the stance of monetary policy The second lesson concerns the setting of the stance of monetary policy in times of financial turbulence. The financial market crisis led to a tightening of credit conditions and to higher risk premia, which is tantamount to a more restrictive monetary policy stance. In order to offset tighter credit conditions and higher risk premia, an adjustment of the policy rate may be appropriate. Such an adjustment is not necessarily synonymous with a more expansionary monetary policy and does not necessarily increase inflation risks. The concept of the Swiss National Bank implicitly takes into account changes in certain risk premia: by steering and stabilising the 3-month Libor, which includes a risk premium, the SNB is constantly adjusting the repo rate in order to offset changes in the risk premium. 8  The report on “Enhancing Market and Institutional Resilience” by the Financial Stability Forum (2008) presents an extensive list of lessons from the financial crisis.

In an internationally coordinated effort, longerterm operations of this kind were intensified in December, in order to meet heightened demand surrounding year-end pressure. In December, the SNB conducted several repo transactions with maturities between three and four weeks to cover year-end requirements. In March, there were three auctions of three-month Swiss franc repos. A consequence of tensions in the money markets was an inefficient distribution of liquidity. While some institutions tended to hoard liquidity, other institutions found it hard to come by. Some central banks therefore enlarged the range of counterparties for their liquidity management operations. A good example of this is the Term Auction Facility (TAF) introduced by the Federal Reserve in December, which provides 28-day term loans. This facility functions essentially like an open market auction, but is open to depository institutions, while access to the Fed’s regular open market operations is restricted to 20 primary dealers. Furthermore, some central banks broadened the range of eligible collateral for their operations. This allowed the banks to keep their best collateral for the money market. Another problem during the crisis was the dollar liquidity shortage of European banks. This resulted in additional uncertainty and in a high intraday volatility of dollar rates. In an internationally coordinated effort, the Federal Reserve therefore, in December, established a US dollar swap line for the ECB and the SNB. On December 17, the SNB, for the first time ever, conducted a repo auction in foreign currency and provided four billion US dollars of liquidity for 28 days to its counterparties.