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Federal Reserve Goes Commercial

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Carl Gutierrez,
Wednesday, Oct 8, 2008

The Federal Reserve got into the money markets on Tuesday, its latest move to try to thaw out gelling credit markets. The move failed to reverse the horrendous losses suffered by equity investors in recent weeks, but it had a small positive effect in the bond markets, the immediate object of the exercise.

On Tuesday the U.S. central bank said it would begin purchasing the short-term corporate debt known as commercial paper from American issuers. The decision helps companies that need to borrow — they will essentially be getting loans from the Fed — but it fails to directly entice money market funds and other private-sector investors into buying the securities. Still, a slight uptick in credit-market yields indicated that some of the natural buyers of commercial paper might be creeping back into the market.

The facility will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers. The central bank said it believed the facility was needed to prevent substantial financial and economic disruptions.

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The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations.

Later Tuesday President Gary Stern of the Federal Reserve Bank of Minneapolis told the Council of Institutional Investors the central bank’s efforts to unlock frozen credit markets should succeed over time to solve the “bear of a problem

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This article was posted: Wednesday, October 8, 2008 at 11:06 am

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