Tue, October 21, 2008
Fed Moves to Aid Money Market Funds A Bit More
The Federal Reserve announced this morning that it is creating a Money Market Investor Funding Facility to ease tensions in the short-term credit markets.
According to Bloomberg, $500 billion has flowed out of prime money market funds since August. Uncertainty about the creditworthiness of banks and other short-term borrowers has been making it difficult for money market funds to find buyers for the short-term debt that they must sell to meet redemptions.
The Fed will back issues of commercial paper and certificates of deposit from “highly rated financial institutions” with maturities of 90 days or less. Normally, the fact that the institutions are highly-rated would be enough to satisfy short-term debt purchasers, but that’s no longer sufficient. With the Fed effectively guaranteeing these debt instruments, buyer confidence should be restored. The plan is to provide backing until the end of April, with the possibility of further extending the program.
This move should provide a little boost to the commercial paper market and shake loose some of the money that has been piling into short-term Treasury bills, which currently are so popular that their yields are triflingly low. However, over at Planet Money, the NPR money blog, news of the new facility is being greeted as “confusing.” Guess we’ll have to wait and see.
