Fed auctions ‘for as long as necessary’

                                                                                                (AP)

The Federal Reserve, working to combat the effects of a severe credit crunch, announced it has auctioned $20 billion (Dh73.5bn) in funds to commercial banks at an interest rate of 4.67 per cent. Fed officials pledged to continue with the auctions “for as long as necessary.”

The central bank said it received bids for $57.7bn (Dh212bn) worth of loans, nearly three times the amount being offered, indicating continued interest in the Fed’s approach to providing money to banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20bn resulted in loans being awarded at an interest rate of 4.65 per cent. There were 93 bidders seeking $63.6bn (Dh234bn) at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement on Friday, the central bank said it would continue with further auctions “to address pressures in short-term funding”.

The auction process was announced by the Fed last week in a co-ordinated action with central bank to address a global credit crunch.

Federal Reserve Chairman Ben Bernanke (pictured above) and his colleagues decided to try the new process because their efforts to inject funds into the banking system through the Fed’s discount window, which makes direct loans to banks, had proven less successful than he had hoped.

Many banks had avoided using the Fed’s discount window out of concern that investors would see the move as an indication of problems. The auction process was developed as a way to get money into the system.

The Fed said it would announce on January 4 the sizes of the next two auctions, which will be held on January 14 and 28. Officials have said the Fed will evaluate the interest in the auctions after the initial four. The new auction results cover short-term loans for 35 days. (AP)