Fed to buy commercial paper from mutual funds
Tuesday October 21, 9:06 am ET
By Jeannine Aversa, AP Economics Writer
Fed says it will buy commercial paper from mutual funds in another move to thaw frozen credit
WASHINGTON (AP) -- The Federal Reserve announced Tuesday that will start buying commercial paper -- a crucial short-term funding mechanism that many companies rely on for day-to-day operations -- from money market mutual funds.
It's the latest effort by the central bank to break through a credit clog that has hobbled lending and threatens to plunge country into a deep and painful recession.
The Fed is tapping its Depression-era emergency powers and creating a new facility to buy a vast array of commercial paper from the funds. Money market mutual funds have been under pressure as skittish investors demand withdrawals. Many companies rely on commercial paper to pay workers and buy supplies.
The situation has led to an intense credit crunch for companies depending on commercial paper.
"The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests," the Fed explained.
The Fed plans to buy an array of commercial paper from the funds. By doing so, the Fed hopes to improve conditions so that banks and other financial institutions will be more inclined to lend to each other and to consumers and businesses.
