Banks sharply boost borrowing from the Fed
Banks increased their borrowing from the Federal Reserve this week, pushing the one-day level to the highest point since the day following the 2001 terrorist attacks.
The Fed reported Thursday that direct borrowing by commercial banks from the Fed totaled $7.15 billion in primary credit Wednesday. That was the highest one-day total since the Fed lent $45.5 billion on Sept. 12, 2001, the day after the terrorist attacks on New York and the Pentagon.
The daily average borrowing from the Fed for the week ending Wednesday totaled $2.93 billion, an increase of $1.83 billion from the average for the previous week.
Both figures were higher than had been expected and indicated that the strains from the credit crisis that hit full-force last month were continuing, analysts said.
“This is a much-higher borrowing total than expected and it is probably a sign that the credit crisis, while it may be moderating slightly, is far from over,” said David Jones, head of DMJ Advisors, a Colorado-based economic forecasting firm.
Treasury Secretary Henry M. Paulson, meeting Wednesday with executives of the nation’s top mortgage companies, said it would take some time before the turbulence that hit financial markets last month was resolved, especially as it relates to sub-prime mortgages.
But, he said, “we are already seeing some signs of improvements in a number of markets that have been experiencing stress.”
Paulson did not elaborate, but a separate Fed report Thursday showed that the amount of short-term borrowing by companies in the form of commercial paper fell by a much smaller amount this week than in the previous four weeks.
The total outstanding amount of commercial paper fell by $8.2 billion to a seasonally adjusted $1.917 trillion for the week ending Wednesday, the Fed reported. That was the smallest weekly decline since the current credit crisis began a month ago. Analysts said it could be an indication that companies are having less difficulty finding investors for their short-term borrowing needs.
Last week, the drop in the level of commercial paper was a much bigger $54.1 billion and in previous weeks, the declines have topped $90 billion.
The discount window is the way the central bank provides direct loans to banks. The Fed announced Aug. 17 that it was cutting the interest it charged banks to make direct loans by half a percentage point. It has been the most dramatic move the central bank has made to signal that it is prepared to do what is necessary to contain the fallout from the credit crisis that began with rising delinquencies in sub-prime mortgages but has now spread to other types of loans.
Jones said he expected the Fed to go further and begin cutting the more economically important federal funds rate next Tuesday at the Fed’s regularly scheduled meeting.
A cut in the funds rate, which has been at 5.25% for a year, would immediately trigger declines in banks’ prime lending rate, the benchmark for millions of consumer and business loans.
