Fed auction draws banks

The Federal Reserve’s special auction aimed at thawing frozen credit markets drew an enthusiastic response, results released Wednesday showed, as banks sought more than three times the $20 billion in cash offered.

The auction, held Monday, drew 93 bidders that submitted offers to borrow $61.6 billion. An interest rate of 4.65% resulted.

“Banks obviously found this to be a useful source of liquidity and were willing to pay well above the minimum to get it,” said economist Kevin Logan at investment bank Dresdner Kleinwort Wasserstein. The Fed set the minimum bid at 4.17%.

The auction was one in a series of steps announced last week by the Fed and other major central banks to ease credit-market strains. A key barometer of their success will be interest rates in money markets, which have generally fallen since the announcements Dec. 12.

The auction “may prove a more effective method for future liquidity injections than the discount window, where there is a stigma associated with accessing funds,” Barclays Capital wrote in a note to clients.

The Fed is scheduled to hold another $20-billion auction today, plus two more in January.