MNI POLICY: Fed Will Start Commercial Paper Funding Facility

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve said Tuesday it will establish an

emergency lending facility to support short-term commercial paper markets to

reduce intensifying signs of funding stress.

     In a statement, the Fed said it was acting to provide credit "that will

support families, businesses and jobs across the economy." The Fed set up a

special purpose vehicle that will purchase unsecured and asset-backed commercial

paper directly from eligible companies.

     The department will provide USD10 billion of credit protection to the

central bank against losses, under the plan approved by Treasury Secretary

Steven Mnuchin.

     "The economic disruption and uncertainty created by COVID-19 has created

challenges for the commercial paper market, constraining access to short-term

credit for American businesses. By providing short-term credit, the CPFF will

help American businesses manage their finances through this challenging period,"

the Treasury Secretary said in a statement.

     The commercial paper market is a crucial source of funds for companies

looking to raise cash for short-term needs. Commercial paper markets directly

finance a wide range of economic activity, supplying credit and funding for auto

loans, mortgages, as well as liquidity to meet the operational needs of a range

of companies.

     Stephen Stanley, chief economist at Amherst Pierpont, said "this is really

a fiscal program being routed through the NY Fed." 

     Analysts predicted after the announcement of the facility that the

Commercial Paper Funding Facility is necessary but not sufficient to deal with

market clogs in the face of the coronavirus, and there remains pressure for the

Fed to open a Term Auction Facility. 

     Pricing of the lending facility will be based on the 3-month overnight

index swap rate plus 200 basis points. The facility will cease purchasing

commercial paper on March 17, 2021, unless the Fed extends the facility.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

[TOPICS: M$U$$$,MT$$$$,MGU$$$,MN$MM$]