Nov. 6 (Bloomberg) -- The Federal Reserve expanded its holdings of commercial paper issued by U.S. corporations by $98.9 billion, boosting its share of the $1.6 trillion market in short-term debt to 15 percent.

The central bank, by increasing its holdings by 68 percent to $244.6 billion in the week ended yesterday, is underpinning the commercial paper market even as funding pressures ease. The Fed extended $243.1 billion of loans to a unit that paid $242.2 billion for the debt, the Fed said today in a weekly report on its balance sheet.

``The Fed is financing the private sector to a pretty large degree,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and former central bank official.

Separately, direct loans to commercial banks fell to $108.6 billion as of yesterday down from a previous record of $110.7 billion a week earlier, while cash borrowing by securities firms totaled $71.6 billion, down from $79.5 billion the previous Wednesday.

The Fed invoked emergency powers on Oct. 7 to start the purchases of short-term debt as the credit freeze threatened the financing tool supporting the daily cash needs for American businesses. The Treasury Department deposited $50 billion with the Fed to begin the program, which started Oct. 27. The maximum amount of commercial paper that can be financed is $1.8 trillion.

Lowest Level

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars dropped to the lowest level in four years. The rate slid 12 basis points to 2.39 percent, the lowest level since November 2004, according to British Bankers' Association data. It was its 19th consecutive decline. A basis point is 0.01 percentage point.

U.S. commercial paper outstanding rose $50.5 billion, or 3.3 percent, to a seasonally adjusted $1.6 trillion for the week ended Nov. 5, the Fed said in Washington. Financial issuance rose $43.8 billion, or 7 percent, to $672.6 billion.

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 more than 1 percentage point since then to 2.24 percent, according to yields offered by companies and compiled by Bloomberg.

The central bank cut the target for the federal funds rate to 1 percent Oct. 29, helping lower overall money market rates. Half of the 42 economists surveyed by Bloomberg News expect at least another quarter point reduction when Fed officials meet next month.

AIG Rescue

The outstanding balance of American International Group Inc.'s $123 billion rescue credit line stood at $81.2 billion yesterday, down from $83.5 billion last week. The Fed first provided an $85 billion loan Sept. 16 in a bailout of the firm's creditors, then authorized another $37.8 billion on Oct. 8.

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 trillion in total assets, $1.2 trillion from a year earlier.

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 $85.1 billion as of yesterday, down from $96 billion a week earlier.

Special Funds

A third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will begin soon. 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 $26.8 billion of assets the central bank took on in its rescue of Bear Stearns Cos.

The Fed also reported that the M2 money supply fell by $48.2 billion in the week ended Oct. 27. That left M2 growing at an annual rate of 6.2 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 figure, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 rose by $32.7 billion. Over the past 52 weeks, M1 increased 4.9 percent. The Fed no longer publishes figures for M3.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: November 6, 2008 17:50 EST