Fed auctions another $25 billion to combat a serious credit squeeze

WASHINGTON (AP) – The Federal Reserve has auctioned another $25 billion in loans to the nation’s banks and given them more time to pay the money back in an effort to combat a serious credit squeeze.

The Fed announced Tuesday that the money would be loaned at a rate of 2.754 percent. In the latest auction, the Fed offered the loans for an extended period of 84 days, rather than the 28-day period for the previous loans.

It marked the Fed’s latest attempt to be innovative in providing the nation’s banking system with the cash it needs to combat a serious credit crisis stemming from mounting mortgage loan losses.

The credit squeeze hit with force a year ago and the central bank has shoveled out billions of dollars in loans. From September through April it also was aggressively cutting interest rates to keep the financial turmoil from pushing the country into a deep recession.

The Fed’s interest-rate setting panel met again last week and for the second meeting held interest rates unchanged amid concerns that lowering rates further could stoke inflation pressures.

Fed policymakers instead indicated that they are likely to hold rates steady for an extended period. That signal bolstered financial markets that had been worried higher inflation pressures might prompt the Fed to start raising rates even though the economy remains weak.

The latest Fed auction was held on Monday with the results announced Tuesday. It saw 64 bidders seeking a total of $54.8 billion in funds. The Fed had announced that it would auction off $25 billion for 84 days.

In two weeks the Fed will auction $75 billion in loans for 28 days. The Fed began the auction process last December in an effort to increase use of its discount window borrowing facility, believing that the auctions would help remove the stigma that banks feared was attached to their petitioning for direct loans from the Fed’s discount window.

Tuesday August 12, 10:26 am ET
By Martin Crutsinger, AP Economics Writer

Source: AP

Leave a Comment