[NYTr] Fed increases money available at auction to aid banks

[All the News That Doesn't Fit]

AP via Yahoo - Jan 4, 2008
http://news.yahoo.com/s/ap/20080104/ap_on_bi_ge/fed_credit_crisis


Fed increases money available at auction to aid banks

By Martin Crutsinger 

WASHINGTON -- The Federal Reserve announced Friday that it is
increasing the amount of money available to banks through the new
auction process it created to ease the nation's severe credit
squeeze. The Fed again pledged to continue the auctions "for as
long as necessary."

The Fed said that it will increase the amount offered at each of
the next two auctions from $20 billion to $30 billion, a 50 percent
jump. Those two auctions will be Jan. 14 and Jan. 28.

The Fed announcement indicated that the auction process it began
last month has been successful in providing a source of loans for
cash-strapped banks.

The first two auctions offered $20 billion each and attracted bids
for about three times that amount.

Federal Reserve Chairman Ben Bernanke and his colleagues decided
to try the auction approach because their efforts to inject funds
into the banking system through direct loans to banks had not been
as successful as hoped.

Banks were hesitant to borrow money directly from the Fed, using a
process known as the Fed's discount window, for fear that it would
carry a stigma that would raise doubts among investors about the
soundness of institutions using the discount window.

The Fed said last month that it would announce on Friday the amounts
to be offered in the January auctions. In a brief statement Friday,
the Fed said that it planned to continue to conduct the auctions
every two weeks "for as long as necessary to address elevated
pressures in short-term funding markets."

Analysts saw the Fed's increase in auction amounts as an indication
of the success of the auctions, which the central bank had never
tried before.

"They are feeling more comfortable with the process and that is why
they are increasing the size of the auctions," said Mark Zandi,
chief economist at Moody's Economy.com.

Treasury Secretary Henry Paulson is scheduled to give a speech in
New York on Monday on how the capital markets are recovering since
financial markets were roiled last month by a severe credit shortage
brought on by soaring mortgage defaults.

The Fed announcement Friday came after release of a government
report showing that the jobless rate shot to a two-year high of 5
percent in December, raising concerns about a possible recession.

The worry is that a severe slump in housing, soaring energy prices
and the credit crisis that hit in August will combine to push the
country into a full-blown downturn.

Analysts said the December jobless report increased the likelihood
that the Fed will continue cutting interest rates as a way of
boosting economic growth. The Fed has cut a key rate three times
starting in September.

The previous two auctions resulted in interest rates of 4.67 percent
and 4.65 percent. That was lower than the 4.75 percent Fed discount
rate, the interest that the Fed charges for making direct loans to
banks. However, it was higher than the 4.25 percent Fed target for
the federal funds rate, the interest banks charge each other for
overnight loans.

The Fed has cut the funds rate three times recently -- a half-point
move in September followed by quarter-point cuts in October and
December.