Today the Federal Reserve Chairman Ben Bernake gave a speach at the National Press Club Luncheon in Washington D.C.  In his remarks, the Chairman notes three chief policy tools.

1. Financial institution access to short-term credit to ease credit in interbank lending markets(This helps with adjustable-rate mortgages, which are often tied to interbank rates such as Libor)

2. The Fed provides liquidity directly to borrowers or investors. Bernanke says that they are purchasing highly rated commerical paper and providing a backup to money market funds. He notes that this should help lead to lower rates and increased availability of credit for businesses, consumers and mortgage credit.

3. The Fed is purchasing longer-term securities, such as GSE debt. (Since they are buying securities this puts more cash into the system, helps keep rates low)

In addition to this, the Fed has what Bernanke calls the "conventional tool" which is the federal funds rate. However, this is nearly bottomed out.

So is it working? According to Bernanke it is helping. Libor, commercial paper have fallen and 30-year conforming mortage rates fell almost 1 percent since the Fed stated that it would buy GSE related securities. While there are a lot of different rates to look at, we take a look at the popular Ted spread, which is often quoted by the folks at Bloomberg, Paul Krugman, Larry Kudlow and others.

Looking at the chart, you can see that fear and confusion was unleashed in September of 2007. The Fed started monetary easing during September in response to observations of a contraction in liquidity. The Ted spread followed a band between just below 100 basis points (bps) and then around two hundred. You can see and probably remember what went on in the fall and winter of last year when fear and confusion was unleashed again and the spread went up to over 450 bps and the Treasury began working on TARP. Apparently, what the Treasury and Fed have been doing has alleviated some of the liquidity issues. Now we are hovering just under 100 bps. I would not even begin to try to forecast this series, with the way new info comes in randomly. I could just hope it continues the easing trend. We will keep watching!