Fed to auction another $25 billion this week

Initiatives

The Federal Reserve announced on Wednesday, that it will auction an additional $25 billion (€16 billion) in super-safe Treasury securities to big investment firms, part of an effort to ease problems in credit markets.

The auction - the second of its kind - will be held on Thursday. In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities as collateral. At the first auction conducted last week, the Federal Reverse loaned $75 billion (€48 billion) worth of Treasury securities to investment firms. Demand for the securities, however, was less than analysts expected. Some viewed that as a possible sign of less stress in the financial system. The auction program is intended to help financial institutions and the troubled mortgage market. The Fed said it would make as much as $200 billion (€128 billion) worth of Treasuries available through weekly auctions.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis. Since the Fed’s announcement of this new program, rates on some mortgages have eased somewhat. The lending program is one of many unconventional steps the Fed has taken recently to help squeezed financial companies overcome any credit crunches and prevent a meltdown of the entire financial system, which would have dire implications for the overall economy. In the broadest use of its lending authority since the 1930s, the Fed last month agreed to temporarily let investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks. (Economic Times)

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