Fed ups credit auction offering

http://news.bbc.co.uk/go/rss/-/1/hi/business/7172644.stm

Version 0 of 1.

The US Federal Reserve has increased the amount of money available to banks as it seeks to help financial markets hit by the global lending squeeze.

It said that banks could bid for $60bn worth of credit this month, instead of the $40bn it had earlier promised.

Two auctions late last year each offered $20bn and were heavily oversubscribed, highlighting the demand for cash from financial institutions.

Fortnightly auctions will continue for as long as necessary, the Fed has said.

Observers said that the Fed's increase in the amount available at auction was a sign of the success of the process, never before tried by the central bank.

"They are feeling more comfortable with the process and that is why they are increasing the size of the auctions," said chief economist at Economy.com, Mark Zandi.

The announcement followed Labor department data showing US unemployment at a two-year high in December, increasing worries about the possibility of a recession.

Serious consequences

Global financial markets have been severely shaken by a massive credit shortage, prompted by mortgage defaults from US homeowners. As losses from investments tied to risky sub-prime debt mount, banks are sitting on their cash until a fuller picture of the financial damage emerges.

The Fed, the European Central Bank and the Bank of England have been acting in unison to inject liquidity into the money markets amid fears that a prolonged stasis in lending could cause have serious consequences for the global economy.

By acting decisively, policymakers hope to force inter-bank lending rates down and make institutions more comfortable about doing business with each other.

On Monday, Treasury Secretary Henry Paulson is due to give an update on how US capital markets are faring.