Fed moves to help businesses get short-term funding in commercial paper market

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The Federal Reserve said Tuesday it is providing help to companies that are having a hard time getting the short-term funding they need to operate.

In a move much anticipated on Wall Street, the bank announced a special credit facility to purchase corporate paper from issuers that have been having a difficult time finding buyers on the open market. Corporate paper involves unsecured short-term lending critical to business funding.

“This is a crucial market for basically short-term borrowing by companies, and if you don’t get this short-term borrowing, you can’t get payments out, you can’t pay your employees, you can’t pay your customers,” Randall Kroszner, a former Fed governor, told CNBC. “If this freezes up, it’s a real problem.”

The market did freeze during the financial crisis in 2008, and the Fed than was tasked with finding a way to get operations flowing again.

The one-day facility announced Tuesday comes under the emergency 13(3) powers of the Federal Reserve Act and will involve three-month paper for eligible companies. The cost will be the three-month overnight index swap rate plus 200 points.

For funding, the New York Fed creates what is called a special purpose vehicle that is guaranteed through the Treasury Department for $10 billion.

The move comes amid several other aggressive policy actions the Fed has taken in recent days.

Most notably, the central bank slashed its benchmark borrowing rate down to near-zero in an emergency move announced Sunday. The Fed also said Sunday it will implement another $700 billion in purchases of Treasurys and mortgage-backed securities.

On Monday and Tuesday the Fed also announced further injections into the overnight lending market known as repo where banks go for their short-term funding operations. 

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