Federal Reserve works with other central banks to deal with credit crunch

WASHINGTON (AP) - The Federal Reserve announced Wednesday 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 $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 $20 billion each will occur next week on Dec. 17 and Dec. 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. This Fed official, who spoke to reporters on a conference call, said that the adverse reaction of Wall Street on Wednesday 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.