Fed auctions $30 billion to banks
WASHINGTON (AP) - January 15, 2008 It marked the third in a series of innovative auctions the Fed
began last month as a way to provide cash-strapped banks with the
reserves they need. The hope is that the increase in resources will
keep banks lending to consumers and businesses and prevent the
credit turmoil that hit in August from pushing the country into a
recession.
There are indications the Fed's efforts are having an impact.
The 3.95 percent interest rate was the lowest of any of the three
auctions it has held. The other two auctions saw rates of 4.65
percent and 4.67 percent.
Analysts said the significant drop in rates reflected in part
the view of markets that the Fed will cut a key interest rate by a
half-point at the end of the month and keep reducing rates as
needed to try to keep the country out of a recession.
"These auctions are helping the Fed do what it wants to do
which is narrow the gap between interbank lending rates and the
federal funds rate," said David Wyss, an economist at Standard &
Poor's in New York.
The funds rate, the Fed's target for loans between banks, is
currently at 4.25 percent, down a full percentage point from where
it stood in early August, before a severe credit crisis sparked by
rising mortgage defaults hit.
The auction result Tuesday means banks were able to borrow the
fresh reserves at a rate below the Fed's current target for the
funds rate. The Fed's discount rate, the interest it charges for
direct loans to banks, is currently at 4.75 percent.
Last week, Federal Reserve Chairman Ben Bernanke said the
auctions so far have been successful and would continue for as long
as they were needed. He said that these auctions might become "a
useful permanent addition to the Fed's tool box" of strategies it
can employ at times when the credit markets have seized up.
Bernanke, in a Washington speech, said that before the new
auctions are made permanent, the Fed would seek public comment on
how they should be designed so that they can be best used by
financial institutions.
There is one more auction scheduled for Jan. 28 but the Fed has
already said it will announce later this month details of auctions
it expects to hold in February.
The new auction process was unveiled by the Fed in mid-December
in a coordinated action with other central banks around the world
trying to address a global credit crunch.
The Fed decided to try the new process because their efforts to
inject funds into the banking system through the Fed's discount
window, which makes loans to banks, had proven less successful than
Fed officials had hoped.
Many banks had avoided using the discount window out of concern
that investors would see the move as an indication of underlying
problems at their financial institutions.
The auction process was developed as an alternative way to get
money into the banking system with the hopes that it would not
carry the perceived stigma of the discount window.