Fed is buying money market fund assets

The Federal Reserve and its fellow central banks are pulling out all the stops to make sure the panic phase of this crisis is well and truly over. These kinds of moves are already having results as Libor and Euribor (the rate at whch banks lend to one another in Dollars and Euros) have come down significantly (see story).

But, according to Bloomberg, the Fed has begun buying assets directly from money market funds in order to intermediate in this important credit market. This is very big news because money market funds have been having problems meeting redemptions.

We should see these latest moves as evidence that the Fed and other central banks are willing to do everything possible to prevent a credit crunch from turning into deflation and depression.

The Federal Reserve invoked emergency authority to purchase assets from money-market mutual funds that are having difficulty meeting redemptions from their investors.

“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 said in a statement released in Washington today. The new program “should improve the liquidity position of money market investors.”

The Fed will lend to a series of special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The new effort is called the Money Market Investor Funding Facility, and is aimed at supporting a private-sector initiative, the Fed said.

“In terms of the redemptions money-market funds are seeing, and hedge funds as well, any of these moves by the Fed are going to help,” Mike Holland, chairman and founder of Holland & Co. LLC in New York, said in a television interview. “We are going to see those redemptions eased.”

The private special-purpose vehicles set up under the program being announced today will finance their purchases by selling asset-backed commercial paper. The New York Fed will also lend to the facilities on an overnight basis at the discount rate, which stands at 1.75 percent.

Top Ratings

Each special purpose vehicle will only purchase debt from ten financial institutions, and ratings on the securities will be at least A1/P1/F1. The Fed said the facility will be in place until April 30 unless extended by the Board of Governors.

The central bank already has two other facilities designed to provide liquidity to the commercial paper market and backstop money fund sales of asset-backed securities.
Bloomberg

Sources
Fed Sets Up New Program to Buy Money-Fund Assets – Bloomberg
Libor for Euros Declines to Lowest Level Since Lehman Collapse – Bloomberg
U.S. Moves Toward Stimulus as Bernanke, Bush Shift – Bloomberg

4 Comments
  1. Stevie b. says

    “We should see these latest moves as evidence that the Fed and other central banks are willing to do everything possible to prevent a credit crunch from turning into deflation and depression.”

    but at what (inevitable?) longer-term cost?

  2. Edward Harrison says

    Stevie b.,

    Good to hear from you. The cost clearly is inflation. I am of the view that the Fed was too late to the party and that deflation will set in by early next year. However, that is a call that is yet to be confirmed.

    In the meantime, the Fed, with all its money and liquidity risks inflation. I certainly appreciate the aggressiveness of the response. But, like you, I worry about unintended consequences.

    Feel free to add your two cents.

    Cheers.

    Edward

  3. Stevie b. says

    Edward – well seeing as you ask – I worry. I actually stopped worrying years ago about the pathetic complacency that got us here from all the vested interests who didn’t want to see beyond the end of their vested noses. But I worry about the same short-sightedness in attacking today’s problems with no thought about tomorrow’s consequences. Just get through the here-and-now and if the consequences are delayed a bit, so much the better cos it’ll be someone else’s yet-bigger problem.

    I worry that no decision-maker is setting out any vision of where we should to be in say 2 years time, or 3 years or whatever. I don’t care that no-one really knows just how bad it’s going to get, I want to know how those making today’s decisions see the end-game of their decision-making. How much leeway is there to keep bailing and guaranteeing whatever happens to come along? If they think there’s a limit, what is it and should that mean a rethink on what’s being bailed-out now, in order to keep something in reserve for what’s undoubtedly to come.

    Meanwhile, just reacting to the next accident in the muddle-through way that mirrors what we’ve recently experienced will risk an eventual catastrophe – a final act too far that will crush the bond market and the currency.

  4. Edward Harrison says

    You will see a post echoing what you say here. We cannot rest on our laurels.

Comments are closed.

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