Fed infusion reins in short-term rates

In an attempt to encourage overnight loans between banks, the Federal Reserve today authorized a $180 billion expansion of swap lines with the European Central Bank and other overseas central banks.

In a separate move, the Federal Reserve Bank of New York reportedly made $105 billion in repurchase agreements available to keep the effective federal funds market trading close to the Fed's 2 percent target rate.

The moves helped bring down interest rates banks charge each other for overnight or short-term loans, which climbed this week over fears related to continued turmoil in financial markets (see story).

The London Interbank Offered Rate (LIBOR) overnight rate for loans in dollars fell to 3.84 percent, down from 5.03 percent Wednesday, the British Bankers Association said. LIBOR, which reflects the actual rate at which banks borrow money from each other in durations ranging from overnight to 12 months, is used to set rates on many adjustable-rate mortgage (ARM) loans.

The Federal Reserve voted Tuesday to keep its target for the federal funds overnight rate at 2 percent, but the rate actually banks actually charged each other jumped to about three times that Monday after the investment bank Lehman Brothers filed for Chapter 11 bankruptcy and the insurer AIG faced difficulties raising capital to stay in business. The Fed announced late Tuesday it would lend AIG up to $85 billion to stay afloat (see story).

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