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Fed Plans $60B Auctions to Banks in Feb.
Friday February 1, 10:09 am ET
By Martin Crutsinger, AP Economics Writer

Fed Announces Auctions Totaling $60 Billion in February to Combat Credit Crisis

WASHINGTON (AP) -- The Federal Reserve said Friday it will provide $60 billion in fresh cash to commercial banks in two auctions in February and will keep holding auctions every other week for as long as needed to ease the credit crisis.

The new auctions, to be held on Feb. 11 and Feb. 25, will mark the fifth and sixth times the Fed has used a new auction process announced in December to provide cash-strapped banks with extra reserves.

In a brief statement, the Fed said that it intended to keep holding the auctions every other week "for as long as necessary to address elevated pressures in short-term funding markets."

The Fed said that the minimum bid amount for the February auctions will be reduced to $5 million, down from $10 million in the previous auctions, to "facilitate participation by smaller institutions."

The Fed's hope is that the increased resources provided to the banking system will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.

On Wednesday, the Fed announced that it was cutting its federal funds rate, the interest that banks charge each other for overnight loans, by a half-point to 3 percent, marking the second big rate cut in just over a week.

Those two reductions in the federal funds rate represented the most aggressive rate cutting by the Fed in a quarter-century and underscored the Fed's resolve to battle the current economic slowdown.

In its statement Friday, the Fed said it would announce the size of the March auctions by Feb. 29.

The Fed started the auction process in December with two auctions of $20 billion each. It boosted that size to $30 billion each for the two January auctions, an indication of the success it was having with the new process.

The Fed went to the innovative auction procedure after it had only limited success in encouraging banks to use its "discount window," where the Fed makes direct loans to commercial banks.

Banks had been reluctant to use the discount window out of concern that they would be perceived as having trouble raising money through other avenues.