WASHINGTON (Reuters) - The Federal Reserve said on Wednesday it auctioned $20 billion in a special operation to thaw credit markets at an interest rate of 4.65 percent, a higher-than-expected rate that suggested banks were eager to pad their cash reserves.
By Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve said on Wednesday it auctioned $20 billion in a special operation to thaw credit markets at an interest rate of 4.65 percent, a higher-than-expected rate that suggested banks were eager to pad their cash reserves.
Banks leaped at the Fed's auction, which was held on Monday, with 93 bidders submitting $61.6 billion in bids. Analysts had expected the interest rate to be somewhere between the overnight federal funds rate of 4.25 percent and the discount rate of 4.75 percent.
The Fed auctioned off the money as part of a coordinated move by central banks around the globe to thaw frozen credit markets.
!ADVERTISEMENT!Demand for the funds and how much banks were willing to pay offered a signal of how deep financial distress is and how important a role the Fed and other central banks can play in easing the strains.
In the financial markets, U.S. stocks advanced, with shares of financial companies gaining. Prices for most U.S. Treasury securities slipped, pushing yields higher, though short-term yields on government debt eased.
The chances of a January interest-rate cut from the Fed, as implied by prices on interest-rate futures contracts, moved down to 76 percent from 84 percent before the results were announced.
Earlier on Wednesday, the second-largest U.S. investment bank Morgan Stanley posted a huge fourth-quarter loss after recording a bigger-than-expected $9.4 billion write-down.
As a rising tide of U.S. mortgage delinquencies sparked a global credit crisis this summer, interbank borrowing costs jumped to unusually high levels when compared with the Fed's target for overnight lending.
A key barometer of the success or failure of the Fed auction and related steps by other central banks will be the reaction of the benchmark three-month London Interbank Offered Rate, or Libor.
Most money market rates have come down since the central banks announced special liquidity measures last week.
The Fed and other major central banks, including the European Central Bank, announced an unusual coordinated action on December 12 to make short-term cash available to banks that were having trouble raising money for their operations.
As part of the coordinated actions announced by central bank last week, the Fed will conduct a second auction on Thursday for up to $20 billion. The Fed is expected to announce some details about the second auction later on Wednesday.
(Editing by Chizu Nomiyama)
