Fed Announces New Money Market Facility

The Federal Reserve announced today that it created a Money Market Investor Funding Facility (MMIFF) that will supply as much as $540 billion of funding to purchase assets such as certificates of deposits and commercial paper from as many as 50 institutions. For now, this facility will include money market mutual funds, and over time it may include other U.S. money market investments.

The Fed's announcement had an immediate impact on the credit markets, as gauged by the two-year swap spread and yield spreads between agency securities and Treasuries, which have narrowed sharply today. The sense is that the new facility will reduce strains on bank capital, chiefly by reducing the tapping of credit lines resulting from the contraction of the commercial paper market, and by helping to support demand for bank debt, including certificates of deposit.

The Fed said that the MMIFF, the Commercial Paper Funding Facility (CPFF), and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) combined are intended to improve liquidity in short-term debt markets and thereby increase the availability of credit.

The MMIFF was created in part, the Fed said, because mutual funds and money market issuers felt that the CPFF and the AMLF were too limited. Moreover, the Fed said that roughly $500 billion was withdrawn from prime money market funds since August.

The Fed's new facility is designed to reduce worries that have been high recently within the money market industry about investing in assets such as certificates of deposits and commercial paper. These worries have been high, in part because of the substantial amount of liquidations that have occurred as a result of the de-leveraging process. This has deterred money market mutual funds from investing in assets they typical invest in, making it difficult for U.S. corporations to obtain the short-term capital they need to fund their daily operations.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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