Investing.com - The Federal Reserve said Tuesday it will step in to help the commercial paper market, which had frozen up amid the market turmoil and threatened day-to-day funding for businesses.
The Fed Board said it is establishing “a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses.”
It is creating a special purpose vehicle (SPV) today to purchase unsecured and asset-back paper, supported by $10 billion from the Treasury Department.
Stock markets responded well to the announcement, with the S&P 500 rising 2.3% after a shaky early start.
“The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak,” the Fed said in a statement. “By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.”
The commercial paper market has shrunk by nearly half since the financial crisis of 2008, but still plays an important role in funding for U.S. businesses. Buyers for CP have dried up in recent days as money market funds - the chief buyers - have withdrawn liquidity in anticipation of clients pulling their money.