Central Banks Are Failing To Restore Confidence in the Global Financial System

This Monday, the U.S. Federal Reserve auctioned an unprecedented $20 billion through its Term Auction Facility on the latest attempt to help the U.S. credit markets to emerge from the crisis in the subprime sector. However, despite the repeated efforts by the world’s most important central banks to inject liquidity in the global financial system, short term interbank lending rates remain well above government bond yields of similar maturity. In sum, despite the recent easing on financial conditions, the outlook on the credit market remains bearish and we think the Federal Reserve will cut interest rates by 25 bps when the FOMC holds its next meeting in January 30, 2008.