Federal Reserve & Interest Rates

The Federal Reserve conducted a $20 billion loan auction, on Monday, for banks that are struggling with liquidity. There were 93 bids in total at the Term Auction Facility (TAF) vying for the credit so they can have some cash flow.

The loans are for a 28-day term with an interest rate of 4.65%. The normal discount rate that the Federal Reserve charges for these loans is 4.75%, making the loans distributed through the TAF .10% lower than usual. Bidders were hoping for a lower rate than that. The maturity date on these loans is set for January 17, 2008.

The total accumulation of bids submitted totaled $61.553 billion. The budget was only $20 billion for the auction, about one third of the total received bids.

Winning bidders were not disclosed. Local Reserve Banks contacted the banks that submitted winning bids yesterday.

Another TAF is set for today at 10:00 am EST. The minimum bid is set at $10,000 per institution, and the maximum bid per institution is $2 billion. The term for these loans will be 35 days. Maturity on these loans is set for January 31, 2008. Banks have until 1:00 pm EST today to submit bids. Winning bidders will be notified tomorrow. Loans will settle on December 27th.

The Fed’s offering is still set at $20 billion for today’s TAF. There are to be more Term Auction Facilities held in January, but amounts and terms have not yet been released.

The circulation of cash flow in the banking system should hopefully give banks the flexibility to function smoothly. Some don’t see how this can solve the issue of the lack of incoming capital in certain banks and constrained balance sheets. This could very well be a temporary solution. It will, however, help with liquidity problems at the start of the year, and possibly slow down a major credit crunch.