Credit stresses may be easing as banks cut Fed borrowing

WASHINGTON -- Banks trimmed borrowing from the Federal Reserve's emergency loan program over the past week, while investment firms took a pass, a hopeful sign that some credit stresses are letting up.

The Fed on Thursday said commercial banks averaged $38.2 billion in daily borrowing over the week that ended Wednesday. That was down from $39.9 billion in the previous week.

Investment firms didn't draw any loans over the past week from the Fed program. That hasn't happened since early September. Firms drew just $482 million in the week that ended May 13.

The identities of the financial institutions are not released. They pay just 0.50% in interest for the emergency loans.

In another encouraging sign, the report showed the Fed's net holdings of "commercial paper" averaged $160.8 billion over the week ending Wednesday, a decrease of $6.1 billion from the previous week.

Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

To help drive mortgage rates down, the Fed boosted its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $430.5 billion over the past week, up $46.4 billion from the previous week. The goal of the program, which started on Jan. 5, is to help the mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the program late last year.

Rates on 30-year mortgages dipped this week. Average rates on 30-year, fixed-rate mortgages, the most popular loan among home buyers, dropped to 4.82%, from 4.86% last week, according to Freddie Mac.

Squeezed banks and investment firms have been borrowing from the Fed because they couldn't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding much of their cash, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, which is now the longest since World War II.