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Fed scales back 2 emergency lending programs

The Federal Reserve on Thursday said it is further scaling back two emergency lending programs as the economy improves.
/ Source: The Associated Press

The Federal Reserve said Thursday it is further scaling back two emergency lending programs as the economy improves.

The action comes as the Fed said in a separate report that banks reduced their borrowing under other emergency programs designed to ease the financial crisis.

The Fed will reduce the amount of money available to banks in short-term loans under a program called the Term Auction Facility, or TAF.

For 84-day loans, the Fed will provide $50 billion in loans in October and $25 billion each in November and December. The total for the loans, which offer an interest rate of 0.25 percent, peaked at $150 billion in June. By early next year, these loans will be shortened to 28 days.

For 28-day loans that also are now offered, the Fed will continue to make $75 billion available monthly through January.

The TAF is one of the government’s emergency initiatives that provided a kind of subsidy for banks because its interest rates were often lower than those offered commercially.

The Fed doesn’t name recipients for these or other emergency lending programs, despite pressure from media groups and some in Congress to do so.

Rates on commercial paper — short-term loans that companies use to pay for daily needs, such as payroll — have in recent months been higher than the TAF rates. Over the past three months, for example, rates have been as high as 0.39 percent.

But recently, the commercial paper rates have been falling. An index measuring average rates for highly rated companies issuing commercial paper showed an average rate of 0.22 percent Thursday.

“The low rates we’re experiencing are due, in large part, to massive infusions of liquidity by the Fed,” said Len Blum, managing partner at Westwood Capital LLC. “There is tremendous liquidity available for the highest-grade debt, but there still is a lack of liquidity for lower-grade borrowers.”

Blum did note, however, that there has been some recent improvement for lower-rated companies.

The Fed also said it will assess whether the TAF should be made permanent and is seeking public comment on it. The program was set up to give banks a ready source of short-term cash beyond the Fed’s emergency lending facility, known as the discount window, where firms can draw low-cost overnight loans.

Across the Atlantic, the European Central Bank said that given limited demand and improved financial conditions, it will stop offering 84-day loans after Oct. 6.

Besides TAF, the Fed is cutting back on a program in which investment firms can temporarily swap risky securities for super-safe Treasury securities. The Fed says $50 billion worth of Treasury securities will be made available for October, down from the current $75 billion. Operations in November and December will be trimmed to $25 billion each.

The actions respond to “continued improvements in financial market conditions,” the Fed said. It builds on earlier steps, announced in late June, to pare down the two programs.

Separately, banks averaged $28.2 billion in daily borrowing from the Fed over the week ended Wednesday, down from $28.7 billion in the week ended Sept. 16.

Banks borrow from the Fed when they have trouble getting the money elsewhere. At the height of the financial crisis last fall, investors cut banks off and shifted money into safer Treasury securities. Financial institutions hoarded much of their cash, rather than lending it to each other or customers. That lockup in lending contributed to the worst recession since the 1930s.

Banks also made less use of another program aimed at increasing the availability of commercial paper. The Fed’s net holding of commercial paper averaged $42.8 billion, a drop of $1.96 billion from the previous week.

The Fed began buying commercial paper under the first-of-its-kind program last October, as the financial crisis intensified. At its peak in late January, the Fed held almost $350 billion of the short-term debt.

With the economy moving from recession into recovery, the Fed is pulling back on some of the extraordinary support it has provided to banks and other companies to cope with the worst financial crisis since the 1930s.

Fed Chairman Ben Bernanke and his colleagues on Wednesday said they will slow the pace of $1.45 trillion program intended to force down mortgage rates and shore up the housing market. And in August, the Fed signaled that it would wind down a $300 billion government debt-buying program aimed at lowering rates on all kinds of consumer debt.

The Fed currently has $816.1 billion of the mortgage-related debt on its balance sheet.

The Fed’s purchases has caused its balance sheet to jump to nearly $2.2 trillion, more than double the level before the crisis struck.

Weaning companies and the economy off the support will be a high-wire act for the central bank. Fed policymakers need to leave the special programs intact long enough to support the recovery — but not so long as to fuel inflation later.

A separate report Thursday from banking regulators found deteriorating credit quality in a snapshot of high-risk loans. The annual report found $642 billion worth of mostly large business loans at risk of falling into default or already in default at the end of last year, the highest level on records dating to 1977.