Aug. 20 (Bloomberg) -- The size of the Federal Reserve’s balance sheet rose 2.3 percent as the central bank bought more U.S. Treasuries and mortgage-backed securities.

Fed assets gained $46.2 billion to $2.06 trillion in the week that ended yesterday, the central bank said today in Washington. Holdings of mortgage-backed securities jumped $66.6 billion to $609.5 billion, and the Fed’s portfolio of U.S. Treasury securities increased $7.1 billion to $736.1 billion.

U.S. central bankers kept the benchmark lending rate in a range of zero to 0.25 percent at their Aug. 12 meeting and extended a $300 billion Treasury purchase program until the end of October. The Fed said economic activity is “leveling out,” and conditions in financial markets have “improved further.”

Chairman Ben S. Bernanke has flooded the banking system with reserves, providing billions in financing and liquidity for banks, and the commercial paper, asset-backed securities and mortgage-backed securities markets. Fed officials are studying the tools needed to roll back monetary expansion.

Credit extended through the Fed’s Term Auction Facility, a mechanism to provide greater distribution of reserves to commercial banks, declined by $12.5 billion to $221.1 billion.

Discount-window lending to commercial banks stood at $29.9 billion yesterday versus $38 billion the previous week. Commercial paper held by the Fed under an emergency program begun in October fell to $49.5 billion from $53.8 billion.

TAF Auctions

Biweekly TAF auctions were reduced to $125 billion in July from $150 billion and cut to $100 billion in August. In June, the Fed extended the currency swaps and other facilities by three months to Feb. 1.

Currency swaps, where the Fed provides dollars to other central banks to lend in their countries, stood at $69.1 billion yesterday, down from $75.2 billion a week earlier.

Credit extended by the Fed in connection with the rescue of insurer American International Group Inc. fell to $76.3 billion from $77.8 billion. In June, AIG announced that it agreed to hand over stakes in two overseas units to the New York Fed to reduce its central bank debt by $25 billion.

Federal agency securities held by the central bank increased by $1.8 billion to $111.8 billion.

Wall Street bond-dealer borrowings stood at zero for the 15th straight week. On May 13 the amount fell to zero for the first time since Sept. 10, just before the collapse of Lehman Brothers Holdings Inc.

Money Supply

The Fed also said the M2 money supply fell by $5.6 billion in the week ended Aug. 10. That left M2 growing at an annual rate of 8.5 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.

For the latest reporting week, M1 fell by $13.4 billion, and over the past 52 weeks, M1 rose 17.5 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: August 20, 2009 17:11 EDT