Fed auctions $75 billion to ease credit stress

Wednesday, May 21, 2008

WASHINGTON -- Working to relieve stressed credit markets, the Federal Reserve has auctioned another $75 billion in loans to squeezed banks, bringing the total to $510 billion since December.

The central bank Tuesday announced the results of its most recent auction -- the 12th -- since the program to help banks overcome credit problems started in December.

It's part of an ongoing effort by the Fed to help ease the credit crunch, which started last August and hit a crisis point in March with the near collapse and forced sale of Bear Stearns, the nation's fifth-largest investment house, to JPMorgan Chase & Co.

Housing, credit and financial problems have weighed heavily on the economy, sharply slowing its growth.

In the latest auction, commercial bank paid an interest rate of 2.100 percent for the short-term loans. There were 75 bidders for the slice of the $75 billion in 28-day loans. The Fed received bids for $84.4 billion worth of the loans. The auction was conducted 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 crunch 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 expand operations and hire workers.

Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed has taken a number of extraordinary actions 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 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 last month 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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