The Federal Reserve announced that it will establish an emergency lending facility to help unclog a short-term credit market that has been disrupted by the viral outbreak.
The Fed said late Wednesday that it will lend money to banks that purchase financial assets from money market mutual funds, including short-term IOUs known as commercial paper.
By facilitating the purchase of commercial paper, which is issued by large businesses and banks, the Fed hopes to spur more lending to firms that are seeking to raise cash as their revenues plummet amid the spread of the coronavirus.
The program is the third facility the Fed has revived from the financial crisis days of 2008, when the central bank set up an alphabet soup of programs intended to keep financial markets functioning.
This facility, known as the Money Market Mutual Fund Liquidity Facility, is intended to help money market funds unload assets such as commercial paper, but also Treasury securities and bonds guaranteed by mortgage giants Fannie Mae and Freddie Mac.
Money market mutual funds are owned by individual investors in brokerage accounts but also by institutional investors and businesses. Many of the funds have sought in the past two weeks to sell assets to raise cash as many investors redeem shares in the funds. Yet with demand for cash rising as stocks plunge and the economy slows sharply, money market funds have struggled to find buyers for their assets.
The Fed’s latest facility is ultimately intended to support demand for commercial paper so businesses are continue to borrow.
The program was established with the support of the Treasury Department, which will guarantee up to $10 billion in loans from the facility.
