Fed throws full weight into commercial lending

The Federal Reserve launched its new commercial lending operation this week, although the data suggested private institutions had yet to follow through with money of their own.

The Fed's new facility has effectively replaced a paralyzed commercial paper market as a method of short-term funding for businesses. As the central bank stepped up its financial rescue efforts, direct U.S. bank borrowing from the Fed decreased but still remained extremely high.

The Fed data also showed a newly minted commercial paper facility pumping an average of $40.8 billion in loans a day into the financial system, recording $144.8 billion on Wednesday alone.

"The vast majority of that we now know was bought by the Fed: some 85 percent," said Michael Feroli, U.S. economist at J.P. Morgan in New York.

Average daily borrowing at the discount window, which includes loans to banks, securities dealers, money market funds and insurer AIG, retreated to $388.8 billion in the latest week from $418.58 billion a week earlier.

Policy-makers hope that their direct interventions will eventually instill enough confidence in the markets that private investment might eventually pick up the slack. So far, this does not seem to be the case.

Outstanding U.S. commercial paper did grow in the latest week after falling for six straight weeks. For the week ended Oct. 29, the size of the U.S. commercial paper market grew by $100.5 billion to $1.550 trillion.

But the area in which the Fed was a key player -- three-month loans -- the bulk of the lending was coming from the central bank itself, analysts said. (Reporting by Pedro da Costa, John Parry, Chris Reese, Richard Leong and Chris Sanders; Editing by Dan Grebler)

http://www.reuters.com/article/bondsNews/idUSN3029406620081030

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Fed throws full weight into commercial lending