Fed teams with central banks on credit crisis

“This is a creative way to try to get more cash into the system without marking anyone as being in trouble,” Zandi said.

In a statement timed before the start of trading on Wall Street, the Fed said it would hold two more auctions on Jan. 14 and Jan.

28. The size of the January auctions will be determined later.

“This is not about particular financial institutions with particular problems. It is about market functioning,” said a senior Federal Reserve official who briefed reporters on condition of anonymity because of the sensitive nature of the actions.

This Fed official, who spoke to reporters on a conference call, said that the adverse reaction of Wall Street on Tuesday had nothing to do with the timing of the announcement. This official said discussions with other central banks about an enhanced action plan had been ongoing for some time.

Wall Street investors and private economists generally applauded the Fed’s latest effort to combat the country’s worst credit crisis in nearly a decade. But private economists said it still was unclear just how successful the auctions would be in overcoming banks’ concerns about getting direct loans from the Fed.

“Clearly, the Fed is feeling its way in the dark here. Current conditions are unprecedented in modern times,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the newly created Temporary Auction Facility.

The Fed said all banks judged to be in generally sound financial condition by their Fed regional bank would be eligible to participate in the auctions for funds.

The Fed said that the new auction process should “help promote the efficient dissemination of liquidity” when other lines of credit were “under stress.”

The experience gained from the four scheduled auctions would be “helpful in assessing the potential usefulness” of this new process to provide funds to U.S. banks, the central bank said. Fed officials indicated more auctions would be scheduled if the first four were successful.

The Fed statement said the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for up to six months.

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