April 10 (Bloomberg) -- The Federal Reserve's new twice- monthly loan auctions have failed to reduce banks' borrowing costs since officials introduced them in December, Stanford University economist John Taylor said.

There is ``no empirical evidence'' the Term Auction Facility has reduced the premium that banks charge each other to lend cash for three months, Taylor, author of a monetary-policy formula cited as a benchmark by analysts, wrote in a research paper. San Francisco Fed economist John Williams co-wrote the study, which was posted on the San Francisco Fed's Web site yesterday.

The paper is one of the first assessments of the Fed's efforts to inject liquidity into the U.S. financial system as policy makers try to stem what the International Monetary Fund termed the worst credit shock since the Great Depression. Chairman Ben S. Bernanke followed up the TAF last month by starting to lend funds directly to investment banks.

``I'm not ready to say that they should abandon it, but I do think that one of its stated purposes has not been borne out,'' Taylor said in a telephone interview yesterday. ``That's an important finding.''

Bernanke will have the chance to discuss efforts to alleviate the financial turmoil in a speech today. He is scheduled to speak at 1 p.m. in Richmond, Virginia, on a report on the credit crisis released by the President's Working Group on Financial Markets last month.

Working Group

The group, which includes the heads of the Fed, Treasury, Commodity Futures Trading Commission and Securities & Exchange Commission, called for stronger management of capital and financial risks.

Officials were frustrated last year when commercial banks limited their use of direct loans from the Fed even as their funding costs soared. Policy makers blamed a ``stigma'' associated with asking the central bank for money.

In December, the central bank introduced the TAF, which allows the Fed to determine the amount of funds it wants to add to the banking system. The auctions have typically been for 28- day funds. The Fed increased the size of the operations last month to $50 billion each, from $30 billion previously.

``We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads,'' Taylor and Williams wrote in the paper. ``We do not mean to imply that the Federal Reserve did not have other goals in creating the TAF, including reducing the stigma associated with discount-window borrowing by banks.''

Fed spokesman David Skidmore in Washington declined to comment.

Higher Premium

The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, was 64.14 basis points yesterday, compared with an average of 34.24 basis points over the past year. The so-called Libor-OIS spread averaged less than 10 basis points in the first half of 2007.

Fed officials have said they aren't using the TAF operations to increase total cash in the system. Instead, the goal is to encourage banks to lend to each other over periods extending beyond overnight.

Because the TAF operations don't provide net new funds, and don't have a bearing on traders' expectations for the Fed's interest-rate decisions, theory suggests they ``will not affect the spread.''

``Our simple econometric tests support both of those implications of our model,'' Taylor and Williams wrote.

Treasury Role

Taylor, 61, served as the Treasury Department's top international official from 2001 to 2005. Williams, a senior vice president at the San Francisco Fed, has worked as a Fed economist since 1994.

The Fed announced the TAF after lowering its benchmark interest rate by 1 percentage point from September to December, a pace that some investors and economists criticized as too slow.

Since the start of the TAF sales, as evidence of economic weakness mounted and credit-market strains spread, the Fed has lowered its benchmark rate by an additional 2 percentage points, to 2.25 percent.

Taylor said he and Williams began the study with an ``open mind'' about the TAF's effect on premiums.

The two contrasted their analysis with remarks from Fed Governor Frederic Mishkin, who said in a Feb. 15 speech that there was ``some evidence that the TAF may have had significant beneficial effects on financial markets.'' Mishkin included the caveat that ``isolating the impact of the TAF on financial markets is not easy.''

``Central bank officials judged that the TAF was working,'' Taylor and Williams wrote.

Bear Rescue

Last month, renewed financial-market turmoil led the central bank to create two new lending programs for Wall Street dealers while approving loans to stem the collapse of Bear Stearns Cos. and ease its sale to JPMorgan Chase & Co.

The $29 billion Bear loan, along with an open-ended commitment to lend to 20 Wall Street securities firms through the Primary Dealer Credit Facility, represent the Fed's first extension of credit to non-banks since the Great Depression.

The authors in their acknowledgments cited former Fed Chairman Alan Greenspan and 11 other people for ``helpful comments and assistance.''

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

Last Updated: April 10, 2008 00:14 EDT