The United States Federal Reserve announced yesterday it was coordinating with other central banks to deal with the global credit crunch.

Wall Street rallied after the surprise announcement.

In a statement timed before the start of trading in New York, the Fed said it planned to offer US$40 billion in emergency funds to banks next week through an auction process.

The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

The first two auctions of US$20 billion each will occur next week on December 17 and December 20.

"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.

Adverse reaction

This Fed official, who spoke to reporters on a conference call, said that the adverse reaction of Wall Street yesterday had nothing to do with the timing of the announcement.

This official said discussions with the other central banks had been going on "for a while."

Wall Street investors applauded the Fed's latest effort to combat the country's worst credit crisis in nearly a decade.

The Dow Jones industrial average was up by more than 200 points in early trading although it later gave back some of those gains.

A day earlier the Dow had plunged 294 points as investors expressed disappointment with what they saw as a lack of urgency on the part of the central bank for dealing with a credit crunch which threatens to push the country into a recession.

The Fed cut a key interest rate yesterday, but by a quarter-point rather than the bolder half-point move that many investors had hoped for.

Direct loans

Analysts said the use of auctions to try to get more money into the banking system was an acknowledgment that efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of bank fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.

In its announcement, the Fed said it had reached an agreement with the European Central Bank as well as the Bank of England, the Bank of Canada and the Swiss National Bank to address what it termed "elevated pressures" in credit markets.

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

The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.

In an article entitled 'Citi names new CEO, chairman' published in Wednesday Business, December 12, 2007, Citi's former CEO and chairman Charles Prince was incorrectly named Charles Pink, who is the chief executive officer of FirstCaribbean International Bank.

We apologise for the error.