Fed to cut TAF liquidity to $200 billion in August

WASHINGTON (Reuters) - The U.S. Federal Reserve said on Friday it will reduce the amount of Term Auction Facility credit offered in August to $200 billion from $250 billion in July due to improved market conditions and reduced borrowing.

The Fed said it would auction $100 billion in 84-day loans on August 10, and $100 billion in 28-day loans on August 24. This compares with $125 billion in each of two similar auctions in July.

"This reduction is consistent with the expectation indicated in the Federal Reserve's June 25 press release that TAF auction amounts would be reduced gradually further in coming months if market conditions continue to improve," the Fed said in a statement.

The Term Auction Facility was introduced in December 2007 to help ease a funding crunch in the interbank market as the financial crisis gathered steam by making it easier for banks to borrow from the Fed anonymously and over longer periods.

The regular TAF liquidity offered peaked at $150 billion per auction at the end of 2008 and early 2009. But in recent months, as interbank lending has strengthened, bank borrowings from the TAF have waned.

A July 13 auction of $125 billion in 84-day loans at a stop-out rate of 0.25 percent drew bids of only $47.768 billion, for a bid-to-cover ratio of just 0.38.

Although the Fed last month extended a number of its other liquidity facilities through February 1, 2010, the TAF does not have a fixed expiration date.

Although the decision announced on Friday marks the second reduction of TAF auctions in a month, the Fed said in the June 25 statement that it reserved the right to increase TAF auctions again if necessary as market conditions evolved.

(Reporting by David Lawder, Editing by Chizu Nomiyama)