The Federal Reserve will reduce the size of two auctions of cash to banks to $75 billion each in September from $100 billion this month in a sign of waning demand for the emergency-loan program.
The Fed will offer $75 billion of 84-day credit on Sept. 8 and $75 billion of 28-day credit on Sept. 21, the New York Fed said Friday in a statement on its website. Biweekly Term Auction Facility auctions were reduced to $125 billion in July from $150 billion and cut to $100 billion in August.
The central bank created the TAF auctions to provide cash to banks after interest-rate cuts failed to boost lending and lower borrowing costs. The program, one of the first of the Fed’s responses to the credit crisis, is partly intended to enable banks to avoid the stigma of directly borrowing from the central bank’s discount window.
“The cutback to $75 billion isn’t going to be a constraint on the market,” said economist Lou Crandall of Wrightson ICAP in New Jersey. “The more interesting question is what they’ll do in October. A further $25 billion reduction, to $50 billion, might bring the auction size below the level of market demand, which would turn the TAF auction into a competitive one for the first time since last summer.”
Fed officials said in a statement earlier this month that the economy is “leveling out.”
James Bullard, president of the St. Louis Fed, said Thursday that he’s optimistic the worst of the economic crisis is over and that the central bank’s liquidity programs will wane.
