Fed creates commercial paper-buying facility – Commercial Paper Funding Facility (CPFF)

October 7, 2008 by · Leave a Comment
Filed under: Economic News 

Well you can’t say that I did not state this would happen after the precedent that was set first with investment banks, insurance companies, commercial banks and auto companies.  California is up and I would figure Alabama might not be far behind.  I will say that this move is one that I can live with because it keeps people employed by providing the short-term funding.  The real risk I see is if our economy gets worse as predicted and these companies can’t not pay back the Federal Reserve and then this goes from a somewhat inflation neutral operation to a inflationary operation because much of this money is going to payroll and inventory expenses and that money will be deployed and as we know, the more our economy sinks then people will panic and the “velocity of money” will increase and that will really make prices on essential goods start to take off.

Release:

The Federal Reserve on Tuesday announced it would create a special-purpose facility, with the Treasury Department’s blessing, to begin buying commercial paper in yet another emergency move aimed at calming chaotic financial markets.  The central bank said it was acting because money market mutual funds and other investors have become increasingly reluctant to buy commercial paper, which is widely issued to provide vital funds for day-to-day business operations at many companies.

 

The central bank said it was acting because money market mutual funds and other investors have become increasingly reluctant to buy commercial paper, which is widely issued to provide vital funds for day-to-day business operations at many companies.

 

“The volume of outstanding commercial paper has shrunk, interest rates on longer term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day,” the Fed said.

 

Treasury believes the facility is necessary to prevent “substantial disruptions” to the financial markets and the economy, the Fed said in a statement.

 

Treasury will make a deposit of funds at the New York Fed to support the facility, though the Fed did not specify the size of the deposit.

 

The central bank’s unusual move, with Treasury backing, to buy debt that is not collateralized might help thaw frozen credit markets, an analyst said.

 

“It will certainly help to improve confidence in the short-term funding markets,” said Derrick Wulf, a portfolio manager for Dwight Asset Management in Burlington, Vt. “It’s pretty unprecedented for a central bank to buy unsecured debt.”

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