Crandall: Don't read too much into Fed auctions

NEW YORK (Reuters) - Wall Street's shifting appetite for the U.S. Federal Reserve's new lending tools may send the wrong signals about the severity of the credit crisis, Wrightson ICAP chief economist Louis Crandall said on Monday.

Investors have been scrutinizing the results of the Fed's lending auctions, trying to divine from the interest rate or the amount of cash claimed how desperate banks were for money.

However, Crandall said, rather than signaling desperation, high demand may be a matter of banks taking advantage of an inexpensive funding source. Speaking at the Reuters Investment Summit in New York, he also noted that low demand for the central bank's money may be a worrisome sign that banks remain unwilling to boost leverage -- and therefore reluctant to lend to the companies and consumers who drive the economy.

Over the past few months, the Fed has launched a series of auctions aimed at restoring credit markets to normal working order. Some of the recent offerings have been undersubscribed, raising questions about whether banks were still craving cash.

Crandall said if demand for the Fed's Term Securities Lending Facility were to rise, it would show that "dealers are willing to leverage and pass on the (credit) to customers again -- it will be an extremely positive development."

At the same time, heavy borrowing at the Fed's discount window, which is typically construed as a sign of distress, showed that the central bank's safety nets were functioning normally.

"That's positive for the system as a whole," he said.

(Reporting by Emily Kaiser; editing by Leslie Adler)

(For summit blog: summitnotebook.reuters.com/)