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US Fed auctions another $30 bln in funds to banks

The US Federal Reserve said Tuesday, it auctioned $30 billion in funds to commercial banks Monday in an effort to deal with a persistent credit crunch.

This was the central bank’s fourth auction aimed at injecting more money into the banking system since mid-December last year, when the Federal Reverse established its Term Auction Facility to deliver short-term funds to banks that are in need of liquidity. The fourth auction produced an interest rate of 3.123%, lower than the rate of 3.95% generated in the previous one, which was held on Jan. 14. The first two auctions, held in Dec. 17 and Dec. 20 respectively and each provided $20 billion to banks, saw rates of 4.65% and 4.67%. Analysts believe the declining interest rates indicated that the new effort made by the US central bank was having an impact.

The new facility was developed as the Fed was trying to prevent the credit crunch from deteriorating. Although the Fed had taken actions, such as rate cuts to add liquidity to the banking system, commercial banks had avoided borrowing money from the central bank through its discount window, which makes loans to banks, out of concern, that investors would see the move, as an indication of the banks’ underlying financial problems. (