Nov. 13 (Bloomberg) -- The Federal Reserve slowed the pace of its commercial paper purchases from U.S. corporations, increasing holdings by $13.9 billion, or 5.7 percent, while borrowing by banks and Wall Street bond traders declined.

The central bank boosted its holdings to $258.5 billion in the week ended yesterday, after a $98.9 billion increase the previous week. The Fed has extended $256.9 billion in loans for the debt, the Fed said today in a weekly report on its balance sheet.

Separately, direct loans to commercial banks fell to $99.2 billion from $108.6 billion as of yesterday, while cash borrowing by securities firms totaled $56.7 billion, down from $71.6 billion the previous Wednesday. The loans are at the discount rate, currently 1.25 percent.

The report shows that total Fed lending still rose because outstanding loans to banks through the Term Auction Facility, which lets companies bid on loans, rose to $415.3 billion from $301.4 billion. The results of those auctions were previously disclosed.

The outstanding balance of American International Group Inc.'s $122.8 billion rescue credit line stood at $83.6 billion yesterday, up from $81.2 billion last week.

The company got an expanded $152.5 billion bailout from the government on Nov. 10, which hasn't taken effect yet. The Treasury will invest $40 billion in funds from the $700 billion Congress provided in bank-rescue legislation, while the Fed's share of the bailout will fall to $112.5 billion.

AIG Bailout

The Fed first provided an $85 billion loan Sept. 16 in a bailout of AIG's creditors, then authorized another $37.8 billion on Oct. 8. Those loans will be replaced by the ones announced this week. The insurer also got access to as much as $20.9 billion from the commercial paper program, AIG said last week in a regulatory filing.

Central bankers are flooding financial institutions with temporary loans in an effort to overcome cash hoarding by banks. The loans have enlarged the Fed's balance sheet to $2.21 trillion in total assets, up $1.32 trillion from a year earlier.

Bloomberg LP, parent of Bloomberg News, filed a lawsuit against the Fed Nov. 7 seeking disclosure of securities the central bank is accepting as collateral for the loans to banks and bond dealers.

In addition to the CPFF, the Fed started a separate program in September to lend to banks for purchases of asset-backed commercial paper from money-market mutual funds. Loans under that program totaled $76.5 billion as of yesterday, down from $85.1 billion a week earlier.

Commercial Paper Purchases

The Fed invoked emergency powers on Oct. 7 to start the purchases of commercial paper as the credit freeze threatened the financing tool supporting daily cash needs for American businesses. The Treasury Department deposited $50 billion with the Fed to begin the program, which started Oct. 27.

American Express Co., the biggest U.S. credit-card company, and General Electric Co. are among companies that sold debt to the Fed.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars, rose today for the first time in more than a month. The rate declined to 2.15 percent today from 4.82 percent on Oct. 10, according to British Bankers' Association data.

U.S. commercial paper outstanding rose $2.9 billion, or 0.2 percent during the week, to a seasonally adjusted $1.6 trillion, as investors bought the most 60-day commercial paper in two months, the Fed said earlier today. An increase in the debt backed by assets including mortgages and car loans led the change, the Fed said.

Expanding Market

The market has expanded every week since the Fed began using the Commercial Paper Funding Facility, or CPFF, to buy commercial paper due in 90 days directly from companies.

Interest rates on the highest-ranked 90-day commercial paper have dropped 1.45 percentage point since then to 1.99 percent, according to yields offered by companies and compiled by Bloomberg. That's 0.53 percentage point less than the Fed currently demands for 90-day paper, including the unsecured credit surcharge of 1 percentage point.

The central bank cut the target for the federal funds rate to 1 percent Oct. 29, helping lower overall money market rates. More than half of 57 economists surveyed by Bloomberg News expect at least another quarter point reduction when Fed officials meet next month.

A third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will begin Nov. 24. Under that program, the Fed will lend up to $540 billion to five special funds to buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or fewer.

Another Fed unit, Maiden Lane LLC, holds the $26.9 billion of assets the central bank took on in its rescue of Bear Stearns Cos.

Money Supply

The Fed also reported that the M2 money supply rose by $200 million in the week ended Nov. 3. That left M2 growing at an annual rate of 6.3 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 rose by $44 billion. Over the past 52 weeks, M1 increased 5.5 percent. The Fed no longer publishes figures for M3.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: November 13, 2008 16:31 EST