Fed auction of $30B sees interest drop
WASHINGTON (AP) - January 29, 2008 It marked the fourth in a series of innovative auctions the Fed
began last month in an effort to provide cash-strapped banks with
extra reserves. The Fed's hope is that the increased resources will
keep banks lending and prevent a severe credit squeeze from pushing
the country into a recession.
The latest auction results indicated that the Fed's program is
having success. The 3.123 percent interest rate for the $30 billion
in short-term loans marked the lowest rate of any of the four
actions. The previous auction resulted in a rate of 3.95 percent
and the first two saw rates at 4.65 percent and 4.67 percent.
Bids for the current auction were received on Monday. The sharp
drop in rates had been expected. Analysts said it reflected the
fact that the central bank cut a key interest rate last week by
three-fourths of a percentage point, the biggest reduction in more
than two decades.
That signaled that Federal Reserve Chairman Ben Bernanke and his
colleagues intend to move aggressively in an effort to prevent a
steep slide in housing and the severe credit crunch from pushing
the country into a recession.
The Fed's rate cut last week represented the first emergency
move between meetings since September 2001. Fed officials are
meeting again Tuesday and Wednesday and financial markets are
expecting that another rate cut, probably by a half-point, will be
announced at the end of those discussions.
Bernanke has said that the current auction process will continue
for as long as needed to make sure that banks have sufficient
reserves. He said the auctions might become a permanent addition to
the Fed's "tool box" of strategies it can employ when credit
markets have seized up.
But he said before that occurs, the Fed would seek comments from
the public on how the auctions should be designed so that they can
be best used by financial institutions.
The Fed went to the auction process in December after it had had
only limited success in encouraging banks to use its "discount
window" where the Fed makes direct loans to commercial banks.
Banks had been reluctant to use the discount window out of concern
they would be perceived as having trouble raising money through
other avenues.
The Fed on Friday will announce the schedule and amounts for
upcoming auctions. The first two auctions in December made $20
billion in short-term loans available and the two January auctions
each provided $30 billion in loans.
(Copyright 2008 by The Associated Press. All Rights Reserved.)