Fed auctions another $30 billion
WASHINGTON (AP) - February 12, 2008 It marked the fifth in a series of auctions that so far have
pumped $130 billion in money into the nation's banking system in
affort 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 making the current
economic slowdown worse.
The latest auction results showed that the Fed's effort is
having success. The 3.010 percent interest rate is the lowest rate
for any of the five auctions held so far. It was slightly below the
previous auction where the interest rate had been 3.123 percent.
The first two auctions in December had seen rates for the funds
provided at 4.65 percent and 4.67 percent while the first auction
in January had seen a rate of 3.95 percent.
Analysts said the sharp decline in rates for the past two
auctions represented the Fed's aggressive rate cutting that
occurred in January, when it slashed its target for the federal
funds rate, the interest that banks charge each other, by 1.25
percentage points, the biggest one-month rate cut in more than two
decades.
Many economists believe that growing signs the economy may have
already slipped into a recession will prompt the Fed to keep
cutting rates at upcoming meetings - with many analysts forecasting
a half-point reduction when the Fed next meets on March 18.
Federal Reserve Chairman Ben Bernanke has said that the current
auction process will continue for as long as needed to make sure
that banks have sufficient reserves. The new process is expected to
become a permanent tool that the Fed can use in times of credit
market turmoil.
The Fed went to the auction process in December after it 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
that they would be perceived as having trouble raising money
through other avenues.
The Fed began with two auctions totaling $20 billion each in
December and then upped the auction amount to $30 billion for each
auction beginning in January.
The total of bids received from banks at the latest auction was
$58.4 billion for the $30 billion that was being provided in
short-term 28-day loans.
