The Federal Reserve took another step late Wednesday to ease strains in the financial system as the coronavirus hammers the economy and markets, making loans available to financial institutions that buy asses from stressed money market mutual funds.
The Fed said the lending program, called the money market mutual fund liquidity facility, will be very similar to one launched during the financial crisis. At that time, money funds inundated with redemption demands could have had to sell short-term business loans, known as commercial paper, to meet the requests. Commercial paper provides companies with funding to meet payroll, buy inventories and pay other daily operating expenses.
Such sales could have depressed the commercial paper market and triggered even more redemptions as well as weakening confidence in the money funds. The new program will provide loans so financial institutions can buy the commercial paper and other assets.
Earlier this week, the central bank revived another crisis-era program to support the commercial paper market, with the Fed making such loans available directly to businesses.
The Fed also has taken other more dramatic steps in response to the widespread economic fallout from the crisis, including lowering its key interest rate to zero and relaunching bond purchases to pump cash into the financial system.