June 25 (Bloomberg) -- The Federal Reserve will let one of its emergency programs expire and trim two others in a sign that improving financial markets allow a first step toward ending its unprecedented interventions.

The three programs provide cash or Treasuries to securities brokers and money-market funds and were authorized under a provision allowing special loans under “unusual and exigent circumstances.” Five programs, including currency swaps with other central banks, were extended by three months to Feb. 1, the Fed said in a statement in Washington.

Today’s announcement comes a day after Chairman Ben S. Bernanke and his colleagues doused speculation they would pump more money into the economy to hold down interest rates. Officials expect to wind down the emergency-credit facilities as long as stresses “moderate as expected,” the Fed said today.

“They backed away pretty gingerly but still are backing away,” said Michael Feroli, a former Fed official who’s now an economist at JPMorgan Chase & Co. in New York. “The crisis is abating and the worst is behind them. In some areas, market functioning remains impaired. Things are better. Better doesn’t mean normal but better. They don’t want to back away too abruptly.”

TALF Decision

The Fed postponed a decision on one of its effort to restart the market for securities backed by consumer and commercial property loans. The Term Asset-Backed Securities Loan Facility, which forms part of a broader effort with the Treasury to address as much as $1 trillion of distressed assets on banks’ balance sheets, currently is scheduled to end Dec. 31.

“Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time,” the Fed said in its statement today. Officials will continue to “monitor closely” the need for their facilities, the central bank said.

The Fed didn’t announce today’s steps in tandem with its Federal Open Market Committee statement on monetary policy yesterday because it needed to coordinate the extension of the swap lines with other central banks, a Fed official told reporters on a conference call.

Reflecting easing funding pressures among the nation’s banks, the Fed will cut the size of credit auctioned under the Term Auction Facility, which was set up in 2007 and designed to provide cash to commercial lenders. “Credit extended under that facility has been well below the offered amount,” the Fed said.

Cash for Banks

Biweekly TAF auctions will be reduced to $125 billion from $150 billion, effective July 13. If market conditions continue to improve, “TAF funding will be reduced gradually further,” the Fed said. The TAF doesn’t have an expiration date.

Auctions under the Term Security Lending Facility, which makes securities available to primary bond dealers, will also be scaled back to a maximum of $500 billion from the previous $600 billion.

So-called Schedule 1 TSLF auctions will be suspended effective July 1. That part of the program loaned out Treasuries in return for collateral including federal agency debt and agency-guaranteed mortgage-backed securities.

TSLF Schedule 2 auctions, where collateral accepted also includes investment-grade corporate, municipal, mortgage-backed debt and asset-backed securities, will be conducted every four weeks, instead of every two weeks, and the total amount offered will be reduced to $75 billion.

TSLF Fades

The TSLF Options Program will be suspended effective with the maturity of outstanding June TOP options, the Fed said. Again, the Fed is prepared to scale back the program further as market conditions improve, the statement said.

While there are no outstanding loans under the Primary Dealer Credit Facility, the Fed extended that resource through Feb. 1. The PDCF was set up in March last year at the time of the collapse of Bear Stearns Cos. to provide direct loans to securities dealers.

The PDCF will remain “in the near term, while financial market conditions remain somewhat fragile,” the Fed said. The central bank official told reporters that one concern is possible funding strains that can typically arise at the end of the calendar year.

Meantime, the Fed put off the expiration of currency-swap programs with other central banks to February. The amount outstanding under the swaps agreements has dropped to less than $150 billion from a peak of more than $580 billion in December.

Dollars for Europe

The Fed first entered into the agreements in December 2007 to increase the supply of dollars available to banks overseas as the liquidity crunch rippled across the globe.

Swap-lines exist with the central banks of Australia, Brazil, Canada, Denmark, Japan, the U.K., euro region, South Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. The Bank of Japan will consider an extension of its dollar liquidity swap and the foreign-currency liquidity swap arrangements with the Fed at its next Monetary Policy Meeting.

The cost of borrowing privately in dollars fell today to the lowest in at least 23 years. The London interbank offered rate, or Libor, that banks say they charge each other for three- month loans, was 0.60125 percent today, the lowest since the British Bankers’ Association began publishing Libor fixings in 1986.

Commercial Paper

Two Fed programs offering liquidity to the commercial paper market are being scaled back.

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) will have a redemption threshold before a fund can sell asset-backed commercial paper (ABCP) that would be eligible collateral for AMLF loans to depository institutions and bank holding companies.

A money-market fund would have to experience outflows of at least 5 percent of net assets in a single day or at least 10 percent in five days to benefit from the program.

Another initiative to help money-market funds was never used and will be allowed to expire. The Money Market Investor Funding Facility was established after the Reserve Money Market Fund fell below a net asset value of $1 following the bankruptcy of Lehman Brothers Holdings Inc. in September.

While the separate Commercial Paper Funding Facility will be extended to Feb. 1, “interest rates posted on the CPFF are at levels that are increasingly unattractive for many borrowers as market conditions improve, and accordingly usage of the CPFF is declining fairly steadily,” the statement said.

“These are steps - modest steps and not unexpected - towards normalization,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale. “The measures will reduce, a little, fears that the Fed’s generosity is excessive.”

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net

Last Updated: June 25, 2009 13:42 EDT