Transcripts

The Fed's Emergency Funds Auction Pays Off

SUSIE GHARIB: The results are in and the Fed's latest attempt to help ease the credit crunch was a big success. The central bank said today that nearly 100 banks participated in Monday's special auction to lend billions of dollars at below-market rates. The hope is that the banks will use the extra funds to make more loans to consumers and businesses. The Fed plans three more special auctions in the weeks ahead. But as Darren Gersh reports, these moves by the Fed are not likely to influence the central bank's monetary policy.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In football terms, the Federal Reserve auction was an end run. Up the middle, there's no opening, because the 20 big banks the Fed normally deals with are worried about their own credit problems and they're not lending to other banks. So, the Fed changed the play and ran around the middle man. Ninety three banks took part in the new term auction facility. The bids submitted on Monday totaled $61.5 billion, three times the $20 billion in one-month loans the Fed was ready to lend. The interest rate came out to 4.65 percent, just below the so-called discount rate banks in trouble have traditionally paid to borrow from the Fed. The interest rates banks are charging each other, though down a bit since the auction was announced, are still high by historical standards. Vincent Reinhart was a key policy adviser at the Fed. He says the auction succeeded in getting more cash to more banks, but bankers are still reluctant to do business.

VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: And if they're worried about lending to other banks, then it might mean that over time, they'll be worried about lending to their customers.

GERSH: The auction timing is no coincidence. With the end of the year in sight, banks are now preparing their annual balance sheets and they are working hard to raise cash and clear off bad investments.

REINHART: That means they're just not willing to lend in the market over the year end. So, as we get closer to the turn of the year, you'll see even more withdrawal from those sorts of commitments.

GERSH: ISI political economist Tom Gallagher calls the auction results progress, but he says it doesn't solve the Fed's main problem.

TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: The market still expects there to be significant tightness in inter-bank lending, even with this new innovation, even after the turn of the year. And that's what the Fed will have to judge is whether or not the continued tightness in that market warrants further interest rate cuts or not.

GERSH: But with the auction on Monday and another tomorrow, the Fed has added a new play to its play book and if needed, the size of the auctions could be ramped up to help keep banks moving money. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.