By Craig Torres
March 7 (Bloomberg) -- The Federal Reserve plans to increase its loans to banks this month to offset a deepening credit crisis threatening to tip the U.S. economy into a recession.
The central bank increased to $50 billion each from $30 billion the amount intended for auctions of funds planned for March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank lends cash in return for assets such as Treasuries.
The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $181 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.
``Given what we have seen in terms of illiquidity in the financial markets in the last four or five days, this came right in time,''
Ajay Rajadhyaksha, head of fixed income strategy at Barclays Capital in New York, said in an interview with Bloomberg Television.
Traders increased bets that the Fed will lower its
benchmark interest rate by at least three quarters of a point this month after a government report showed the biggest job loss in five years, adding to evidence the economy is contracting. Odds of a full percentage-point reduction, to 2 percent, jumped to 26 percent from zero yesterday, futures prices showed.
Not Keyed to Jobs
Fed officials said today's announcement wasn't related to the Labor Department's jobs report, and was aimed at addressing the deterioration in credit markets. The officials, speaking on condition of anonymity in a conference call with reporters, also said the measures won't expand the Fed's balance sheet.
Federal Open Market Committee members are next scheduled to meet on March 18. As credit stresses increased since the last gathering on Jan. 29-30, speculation has increased among traders that officials would consider lowering rates before the next meeting, as they did on Jan. 22.
Officials said they will keep the benchmark
federal funds rate target around the level set by the FOMC, indicating they don't plan for the liquidity measures to drive the rate lower.
Further Increases
The Fed said it will increase the sizes of both the so- called Term Auction Facility operations and the repurchases ``if conditions warrant.'' The
central bank introduced the TAF, a lending tool that allows banks to give the Fed a range of collateral in return for loans, in December. The TAF loans for this month have a 28-day maturity.
``What the Fed's saying with the TAF changes is, `We hear you and we want to ensure everybody has financing for good collateral,''' said
Joe Tully, managing director of the money- market desk in Newark, New Jersey, at Prudential Investment Management, which oversees about $55 billion.
The Federal Reserve Bank of New York said in a
statement that the first of the 28-day repo operations will be conducted today, in the amount of $15 billion.
Repos allow the central bank to inject funds into primary dealers, a group of 20 banks that trade securities directly with the New York Fed. By contrast, the TAF operations offer funds to deposit-taking institutions; the most recent auction included 72 banks.
Talking With Europe
The Fed said it is ``in close consultation'' with other central banks. In December, the Fed loaned $24 billion to the European Central Bank and Swiss National Bank through a swap agreement to make more dollars available to banks in Europe.
``If need be, we could certainly continue'' to coordinate with the Fed, ECB spokeswoman
Regina Schueller said, citing remarks by President
Jean-Claude Trichet.
The SNB said it has no plans to join in dollar auctions, spokesman
Werner Abegg said.
Money market rates are again rising as banks hoard cash. Borrowing costs had fallen earlier in the year after the Fed lowered interest rates and added longer-term liquidity through the TAF operations.
Investors are questioning the worth of even the highest- rated securities after Standard & Poor's and Moody's Investors Service assigned AAA grades to bonds backed by mortgages to borrowers who are now struggling to make their payments.
Carlyle Group's mortgage-bond fund was suspended in Amsterdam today after creditors forced the sale of some holdings, jeopardizing shareholders' capital.
The Fed is also trying to contain the fallout on the broader U.S. economy, which is moving closer to recession. Employers cut payrolls by 63,000 after a loss of 22,000 in January, the Labor Department said today.
The central bank said that the TAF operations will be continued for at least the next six months. Fed Chairman
Ben S. Bernanke said in January that officials may make the resource a ``permanent addition to the Fed's toolbox.''
To contact the reporter on this story:
Craig Torres in Washington at
ctorres3@bloomberg.net Last Updated: March 7, 2008 10:44 EST
