Crisis response: change in central bank interactions with markets The Markets Group’s monitoring responsibilities and broad array of contacts across different market segments were critical to identifying underlying causes of the increased volatility and sharp repricing observed across a wide range of financial markets in 2007 and 2008. This information contributed to policymakers’ understanding of where and how to target liquidity support measures beyond the traditional form of discount window lending to depository institutions. The temporary liquidity facilities were designed by drawing upon skills across the Federal Reserve System including market and operational experts, lawyers, economists and accountants. Given the unprecedented shocks to the market and the economy more broadly, the facilities had to be set up very quickly – in a matter of days or weeks. These included facilities designed to lend to banks and primary dealers to ensure adequate access to shortterm credit, such as the primary dealer credit facility (PDCF) and the Term Securities Lending Facility (TSLF). Other programs were designed to lend directly to borrowers and  2  To further this objective, the New York Fed also sponsors a private-sector group of market participants – the Treasury Market Practices Group – to support the functioning of Treasury, agency debt, and agency mortgage-backed securities markets. For further information, see the following: http://www.newyorkfed.org/ tmpg/index.html.

The Federal Reserve Act limits the types of securities the Federal Reserve may purchase in its OMOs, and under its Authorization for Domestic OMOs the FOMC only authorizes transactions in us government securities, which includes Treasury and agency securities.1 The staffs that have direct responsibility for executing OMOs are known as “the Desk.” Until late 2008, the primary role of the Desk was to influence the daily federal funds rate by adjusting the aggregate level of reserves in the banking system through transactions in Treasury securities arranged with designated primary dealers–counterparties operating in the  1  For the full Domestic Authorization, see the minutes for the first FOMC meeting of each year. The minutes for the January 2012 FOMC meeting are as follows: http://www.federalreserve.gov/monetarypolicy/ fomcminutes20120125.htm. BIS central bankers’ speeches  1  government securities market. OMOs typically employ an auction format to ensure competitive bidding and are structured in a manner that minimizes disruptions to market functioning. The Markets Group has several other critical transactional responsibilities as well. It is responsible for lender of last resort activities in the New York Federal Reserve District, operating the discount window as a source of short-term loans for banks in sound financial condition but otherwise in need of funding. As fiscal agent of the U.S. Treasury, the Markets Group plays a role in conducting Treasury auctions and facilitates payments and other financial services for the Treasury. The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions.