The Federal Reserve late Wednesday said it was launching a program to support money market mutual funds as alarm over the coronavirus continues to cause strains in short-term funding markets.
The Money Market Mutual Fund Liquidity Facility, established under the Fed’s emergency authority, echoes a version that was set up during the global financial crisis. The Treasury Department will provide $10 billion of credit protection.
U.S. Treasury Secretary Steven Mnuchin said in a statement the fund would “enhance the liquidity and smooth functioning of money markets, support the flow of credit to hard working Americans, and help stabilize the broader financial system.”
Earlier Wednesday, the Treasury Department had proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News.
“Money market funds are common investment tools for families, businesses, and a range of companies,” the Fed said in its statement. “The MMLF will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.”
The Fed’s action comes hours after the European Central Bank’s late-night emergency decision to launch an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm markets and protect the euro-area economy. Also, at the same time as the Fed announcement, the Reserve Bank of Australia said it was cutting its benchmark rate by a quarter point to 0.25%.
Emergency Actions
The dramatic late-night step was the central bank’s third emergency lending facility in two days, after the Fed on Tuesday unleashed measures to support the commercial paper market and primary dealers to ensure credit keeps flowing in the U.S. economy. It slashed interest rates nearly to zero on Sunday and said it would buy at least $700 billion in securities to soften the blow from the virus that has Americans hunkered down to avoid infection.
Money market funds essentially provide credit to everything from banks through repurchase agreements to corporations through purchases of commercial paper. They are a critical link the chain of short-term finance where companies borrow and lend outside the formal banking system.
Carve a Firebreak