The Federal Reserve’s special liquidity facility is similar to the so-called “Lombard” credit facilities offered by a number of European central banks. We do not intend for any supervisory or market stigma to be attached to use of the facility; if it does, then the potential for this facility to ease Y2K liquidity needs may not be fully realized.
If banks are willing to utilize the facility, it should help to maintain orderly markets and to cap the federal funds rate in those markets. One final point about liquidity – as I said above, we expect payment mechanisms to function smoothly. However, it is possible that currency demands will increase over the next few months.