The U.S. Federal Reserve announced Tuesday that it will start buying commercial paper from money market mutual funds to provide liquidity to U.S. money market investors.
This is the Fed's latest effort to battle the credit crisis that threatens to plunge the world's largest economy into a recession.
In a statement, the U.S. central bank said it is tapping its Depression-era emergency powers and creating a new facility to buy a vast array of commercial paper -- a crucial short-term funding mechanism that many companies rely on for day-to-day operations --from the funds.
Money market mutual funds have been under pressure as 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 in the statement.
By buying an array of commercial paper from the funds, the Fed hopes to improve "the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments."
"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.
(Xinhua News Agency October 21, 2008)