NEW YORK - The Federal Reserve, in a move to manage bank reserves in anticipation of a pick-up in bank borrowing from the Fed, will not reinvest $5 billion in proceeds from maturing Treasury securities this week,

On Friday, in response to market turmoil, the Fed in a surprise move cut its direct lending rate to banks by half a percentage point to encourage banks to make more loans amid worries of a credit squeeze. The $5 billion could be used to provide for some of the loans, analysts said.

At the same, the Fed has not signaled that it is ready to ease monetary policy by lowering the federal funds rate target — its main interest rate lever — which some traders and analysts consider as vital to boost market confidence and to jump-start the lending activity.

"They are holding out until something else happens," said Robert Brusca, chief economist at Fact and Opinion Economics in New York.

The Fed's announcement coincided with another dramatic drop in yields on Treasury bills, or T-bills, due to heavy demand for cash or low-risk cash-equivalents. One-month yields briefly fell to 1.28 percent Monday, the lowest level since August 2004, according to Garban ICAP.

"People are looking for safety, so they are trying to buy the safer securities around, specifically Treasury bills," said Charles Lieberman, chief investment officer at Advisors Capital Management in Paramus, New Jersey.

The draining of money would also help stabilize the federal funds rate at the Fed's policy target of 5.25 percent. Given the flood of money from the Fed's recent moves, the fed funds rate — the cost of overnight loans between banks — has often slipped below the Fed's target. Last week, the fed funds rate fell as low as zero percent in overnight trading.

BILL REDEMPTION

To achieve the $5 billion redemption, the Fed's investment portfolio — System Open Market Account, or SOMA — bought $7.1 billion of 26-week Treasury bills due Feb 21, 2008, and $5.2 billion of 13-week bills due Nov. 23, 2007. It will refrain from purchases in Tuesday's $32 billion auction of 4-week bills due Sept. 20, 2007, said the New York Fed Bank, which conducts the Fed's market operations. All of these bills settle Thursday.

The actions involving this week's T-bill auctions is designed to give the Fed "greater flexibility in the day-to-day management of reserve levels to offset factors that may add reserves to the banking system such as additional discount window borrowings," the Fed said in a statement.

SOMA is comprised of U.S. Treasury securities and other investment denominated in foreign currencies. At the end of 2006, SOMA grew to $815.7 billion, according to the New York Fed Web site.

Meanwhile, the New York Fed said it will "continue to evaluate the need for the use of other tools to add flexibility to its open market operations."

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