Fed to boost auction amounts to aid banks
January 4, 2008

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.
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