Fed Lowers Minimum Fee Rate on Securities Lending Program

The U.S. Federal Reserve took several more steps Tuesday to add to the liquidity of the banking system.

First, it added $3.75 billion of temporary reserves to the banking system through overnight repurchase agreements, which will help ease short-term lending conditions.

Then, the Federal Reserve Bank of New York said it has decreased the minimum fee rate of its securities lending program to 0.50 percent from 1.00 percent, effective immediately.

The New York Fed said in a statement the change to the System Open Market Account is temporary, and that all other program terms remain unchanged.

This will help the terms under which banks borrow money from the Federal Reserve.

The new injection of cash brings the amount the central bank has injected into the banking system via overnight repos since Monday to $7.25 billion.

The Fed said the collateral accepted on the overnight repurchase was made up of $2.75 billion of agencies and $1 billion of mortgage-backed securities. There were no Treasury securities accepted out of the $12.450 billion bids submitted.

A total of $32.994 billion in bids were submitted for the overnight repurchase. Federal funds, the benchmark overnight lending rate to banks, traded at 5.063 percent, well below the Fed's targeted rate of 5.25 percent.

The Fed's unexpected reduction of the primary discount rate by half a percentage point to 5.75 percent last Friday has fueled speculation that it could cut rates at next month's policy meeting or even before then.

Fed fund futures are fully pricing a 50 basis point rate cut to the fed funds rate at or before the next monetary policy meeting on Sept. 18.

© 2008 CNBC.com