The Federal Reserve auctioned off $75 billion in short-term loans to commercial banks Monday through its Term Auction Facility, with the results of the auction announced Tuesday.
"The awarded loans will settle on May 8, 2008, and will mature on June 5, 2008," according to a press release from the Fed.
There were 71 total bidders, who requested $96.618 billion in loans, exceeding the accepted $75 billion.
The stop-out rate for the loans was 2.22 percent, according to a press release from the Fed.
"Bids at the stop-out rate were prorated at 92.52% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000)," according to a press release from the Fed.
The stop-out rate, also known as the lowest accepted bid rate, is the interest rate set through a single price auction process. The stop-out rate is the interest rate which all awarded institutions will pay upon maturity.
"The stop-out rate came in above the 2.00 pct Fed funds target rate and below the 2.25 pct discount window rate," according to Forbes.
The bid-to-cover ratio was 1.29, according to a press release from the Fed. The bid-to-cover ratio is determined by dividing the number of bids by the number of bids accepted. The higher the bid-to-cover ratio, the higher the demand.
Monday's auction was "part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March," according to the Associated Press. "The housing, credit and financial crises have weakened the economy and threaten to push it into recession."
In its previous three auctions—two in April and one in March—the Fed auctioned off $50 billion in loans each time. In its earliest auctions, held from December through February, the Fed offered $20 billion to $30 billion in loans at each auction. This auction was the first one in which the Fed auctioned $75 billion in loans. The Fed has auctioned off a total of $435 billion in loans in 11 auctions, since they started holding the auctions in December.
"In mid-December the Fed announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and to help them over the credit hump. A global credit crisis has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses," according to the AP. "The smooth flow of credit is the economy's life blood. It permits people to finance big-ticket purchases, such as homes and cars, and help businesses to expand operations and hire workers."
"The Fed has promised to continue the auctions for at least six months and has said it can increase the amount offered if financial conditions warrant," according to Forbes.
