The Federal Reserve said Tuesday it’s reviving a crisis-era source of funding for businesses that need short-term loans to cover operating expenses.
The commercial paper market is made up of the investments that provide money for loans many companies use to make payroll, buy inventories and keep their businesses running day-to-day.
When the economy is wobbly, as it is now, investors demand a high premium to hold commercial paper, forcing companies to seek loans from banks. But banks themselves are under stress, with cash reserves dwindling until the Fed’s recent injections and companies at risk of defaulting on their loans as revenue dries up.
The Fed is effectively stepping in as a lender of last resort for the commercial paper market, announcing that it will buy the assets directly.
That’s similar to what happened during the 2008 financial crisis. Investors moved their cash from money market mutual funds that invest in risky companies and buy commercial paper to safer money market funds. As demand a result, demand for commercial paper evaporated.