Federal Reserve Chairman Ben Bernanke, right, accompanied by Treasury Secretary Henry Paulson, testifies on Capitol Hill in Washington, Tuesday, Sept. 23, 2008, before the Senate Banking Committee hearing on the credit market turmoil. (AP Photo/Susan Walsh)
WASHINGTON – The Federal Reserve announced Tuesday that it will start buying commercial paper — a crucial short-term funding mechanism 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 the 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 — including some that is not backed by assets as well as those with remaining maturities of 90 days or less. The Fed also will buy dollar-denominated certificates of deposit.
By doing so, the Fed hopes to improve conditions so banks and other financial institutions will be more inclined to lend to each other, and to consumers and businesses.
"Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households," the Fed said.
For about a month, the Fed has been making billions of dollars worth of loans to money market mutual funds — via banks — to help relieve pressures on the funds. And, in a separate program that launches on Oct. 27, the Fed will buy vast amounts of commercial paper from an array of companies.