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Fed to Buy up to $1.3 Trillion of Commercial Paper

By Editorial Staff

October 7, 2008

The Federal Reserve announced Tuesday it will buy up to $1.3 trillion of the top-rated asset-backed and unsecured commercial paper in the markets—virtually a business loan bailout due to frozen money markets, the closest the government has come to making loans to businesses directly.

 

It is an extraordinary move to shore up the economy, as the commercial paper market, once considered very safe and liquid, had averaged $2 trillion but fell to $1.82 trillion on Sept. 10 and $1.6 trillion on Oct. 1.

 

Issuers of commercial paper that is not asset-backed will be required to pay up-front fees.

 

The Department of the Treasury said it “believes this is necessary to prevent substantial disruptions to the financial markets and the economy [since the] commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors facing liquidity pressures have become increasingly reluctant to purchase commercial paper.”

 

The government hopes that by eliminating risk in commercial paper, demand will rise and rates will return to normal levels.


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