VOL. 123 | NO. 30 | Wednesday, February 13, 2008
Fed Auctions Another $30 Billion to Combat Severe Credit Crisis
By MARTIN CRUTSINGER | AP Economics Writer
WASHINGTON (AP) - The Federal Reserve, seeking to combat the effects of a serious credit crisis, said Tuesday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.010 percent.
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 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 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.
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