Fed auctions another $75 billion to banks

May 6, 2008 9:35:34 AM PDT
Battling to relieve stressed credit markets, the Federal Reserve said Tuesday it has provided a total of $435 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank announced the results of its most recent auction - $75 billion in short-term loans - the 11th such auction since the program started in December.

It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March. The housing, credit and financial crises have weakened the economy and threaten to push it into recession.

In the latest auction, commercial banks paid an interest rate of 2.220 percent for the loans.

There were 71 bidders for the slice of the $75 billion in 28-day loans. The Fed received bids for $96.62 billion worth of the loans. The auction was conducted on Monday with the results released Tuesday.

In mid-December the Fed announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and to help them over the credit hump. A global credit crisis has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.

The smooth flow of credit is the economy's life blood. It permits people to finance big-ticket purchases, such as homes and cars, and help businesses to expand operations and hire workers.

Credit problems worsened earlier this year, driving investment house Bear Stearns to the brink of bankruptcy and spurring fears other big Wall Street firms could be in jeopardy. Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed took a number of extraordinary moves to provide relief. In its broadest extension of lending authority since the 1930s, the central bank agreed to temporarily let investment firms obtain emergency loans directly from the Fed, a privilege that only commercial banks had been granted.

The toll of housing and credit problems, however, have made both people and businesses more cautious in their spending. And that has significantly weakened the overall economy.

Last week the Fed announced it was boosting the amount of loans auctioned to commercial banks to $150 billion in May, up from the $100 billion it made available in April.

The central bank is expected to focus more on these and other efforts to help banks and investment firms overcome any credit problems as it winds down an aggressive rate-cutting campaign that started last September.

To help bolster the economy, the Fed also last week lowered a key interest rate by one-quarter percentage point to 2 percent. However, it signaled that may be the last reduction for some time. The Fed is hoping that its powerful rate cuts along with the government stimulus package of tax rebates will help lift the economy out of its funk in the second half of this year.

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