Fed Partners with Central Banks to Ease Credit The Fed and other central banks will collaborate to better manage the global credit crunch. The Fed plans to offer $40 billion in emergency funds to banks through an auction process. Commercial banks would bid at auction for funds to raise money for loans to businesses and consumers.
NPR logo Fed Partners with Central Banks to Ease Credit

Fed Partners with Central Banks to Ease Credit

The Federal Reserve and other central banks are collaborating to better manage the global credit crunch.

The Fed announced in a statement Wednesday plans to offer $40 billion in emergency funds to banks next week through an auction process.

The temporary auction facility will make funds available to banks as well as set up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

Under the plan, commercial banks would be able to bid at auction for funds. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.

The first two auctions of $20 billion each will occur on Dec. 17 and Dec. 20. Others are set for Jan. 14 and Jan. 28, with the amounts not yet set.

"This is not about particular financial institutions with particular problems. It is about market functioning," according to a senior Federal Reserve official who briefed reporters on condition of anonymity because of the sensitive nature of the actions.

The surprise announcement, timed before the start of trading on the New York stock exchanges, sparked a 200-point rally on Wall Street.

The stock market sank nearly 300 points on Tuesday as investors registered their disappointment with a quarter-point cut in interest rates. They were anticipating a half of a percentage point drop in rates.

The Fed official asserts that news of the collaboration with other central banks was not intended to trigger a stock rally.

According to the announcement, the Fed will work with the European Central Bank as well as the Bank of England, the Bank of Canada and the Swiss National Bank to address "elevated pressures" in credit markets.

Since the global credit crunch hit with force in August, other central banks as well as the Federal Reserve have been injecting massive amounts of money into the banking system in an effort to keep credit flowing.

However, those efforts have only been partially successful. Many businesses and consumers report rising trouble in obtaining loans as banks become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

Economists were both impressed and cautious about the Fed's plan, saying the experiment at finding another way to inject cash into the banking system had not been tested.

"Clearly, the Fed is feeling its way in the dark here. Current conditions are unprecedented in modern times," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Analysts said the use of auctions to try to get more money into the banking system was an acknowledgment that efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of banks' fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.

The Fed said all banks judged to be in generally sound financial condition by their Fed regional bank would be eligible to participate in the auctions for funds.

The Fed said that the new auction process should "help promote the efficient dissemination of liquidity" when other lines of credit were "under stress."

It said that the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for up to six months.

From NPR reports and The Associated Press