Tags: US | Fed | Emergency | Lending

Banks Trim Emergency Borrowing Further From Fed

Friday, 21 May 2010 01:14 PM


Banks borrowed slightly less from the Federal Reserve's emergency lending program over the past week, further evidence that credit markets are improving.

The Fed said that banks averaged $5.11 billion in daily borrowing for the week that ended Wednesday. That is down from $5.15 billion in daily borrowing for the previous week.

Loans from the central bank's emergency lending program, known as the discount window, surged to a high of $110 billion a day during the height of the financial crisis in the fall of 2008.

With financial and economic conditions improving, the Fed has been winding down its special lending program.

The largest of these efforts was a $1.25 trillion program to purchase mortgage-backed securities issued by Fannie Mae and Freddie Mac in an effort to lower mortgage rates and provide a boost to the depressed housing market.

The new report showed that these holdings averaged $1.12 trillion for the week ending Wednesday, up by $23.38 billion from the daily average in the previous week.

Some economists have worried that mortgage rates would start rising once the Fed's purchases of mortgage-backed securities ends. But Fed officials have stressed that even after new purchases end, they central bank will still be holding a sizable portfolio of these types of securities. They have said this will help provide support to the mortgage market.

Freddie Mac reported Thursday that mortgage rates fell to the lowest level of the year this week, with the national average on 30-year fixed rate mortgages dipping to 4.84 percent, down from 4.93 percent last week.

This drop reflects the fact that bond yields in this country have fallen as the demand for dollar-denominated debt has risen from investors spooked by the debt crisis in Europe.

Minutes of the Fed's April 27-28 meeting released this week showed that Fed officials were divided over the timing and the details of how the Fed should reduce its holdings of mortgage securities.

Some favored an approach where the Fed would "soon" announce a general schedule for selling assets, while most favored an approach of beginning sales some time after the Fed's first increase in its key short-term bank lending rate. Such an approach would postpone any asset sales until the economic recovery was firmly entrenched.

The Fed minutes did not indicate that the issue on timing of the sales was resolved during the April discussion.

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