Tuesday, October 21, 2008

The Federal Reserve's Money Market Investor Funding Facility

The Federal Reserve seems to have an endless supply of new programs to roll out these days in its attempt to further ease credit markets (particularly short term). Of course, we already have:
  1. the Commercial Paper Funding Facility (CPFF), which on October 27, 2008 will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers, and

  2. the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), announced on September 19, 2008, which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds.

Now, we also have the Money Market Investor Funding Facility (MMIFF), also rolling out on October 27, 2008! The AMLF, CPFF and the MMIFF are all intended to ease credit by making sure that there is liquidity in the short term debt markets. Yet, each program is targeted at a limited slice of short term debt. The MMIFF will be a Fed credit facility provided to certain private sector "special purpose vehicles" (PSPVs). The PSPVs can purchase eligible money market instrument. The Fed's term sheet provides for purchase of certificates of deposit, bank notes and commercial paper with a materity of ninety days or less. Purchases will be made using asset backed commercial paper or funding from the MMIFF. This program is intended to be short-term, with a termination date of April 30, 2009.

All of this should go to show the commitment of the Federal Reserve to backing up the short term credit markets. All of this might seem a collection of fancy programs. Ben Bernanke (I think correctly) is worried that any further problems with short term will cause more mischief in the markets if not attended to by the Federal Reserve. With company earnings reports for the third quarter being sluggish for many companies, problems with the short term credit that companies depend on would only make matters worse. Score 3 for the Fed on short term credit. And, if it doesn't do the trick here by April, the Fed left open the window to extend programs.

Bernanke is also calling for more stimulus programs. We'll see if they too are innovative. They very well may have to be in order for our economy to recover more quickly. Bernanke has been short on details about programs that might help, but expect wider based programs to be in the mix. Although Bernanke is not yet saying we are in a recession, the outlook is not rosy.



Jason Kilborn said...

Bernanke just doesn't want to use the "r" word publicly. He and Paulson are making extraordinary efforts to avoid the extreme pain of a big "R" rather than a small "r," though. The money market initiative is yet another in a series of what will likely to turn out to be minor interventions substantively. The idea here is to assure money fund managers that, IF they face a run from depositors who irrationally fear losing their money, the feds will be there to provide liquidity to avoid an explosion. This is yet another mechanism for (1) providing liquidity to (2) overcome irrational pessimism and risk aversion that (3) we hope will not come to pass, so (4) the Treasury will likely make money on this.

The money funds are a (perhaps THE) key player in the short-term credit markets, so offering them comfort to begin again investing in short-term commercial paper, etc., is key.

How are we doing? Overnight LIBOR is now 38 bp below the fed funds rate (today, 1.12%), and 3-month LIBOR fell another 29 bp overnight to 3.54%. As I've said before, this is still elevated, but we're seeing a decline of about a quarter point daily. If authorities here and abroad continue these actions, at least the financial crisis can be left behind, leaving only the real economic crisis to deal with--and the financial authorities can't help us there. Perhaps another "stimulus" plan???

Jennifer Martin said...

Agreed. Bernanke is already saying that another stimulus plan is needed. So, now we wait and see. I've told my students that all of this is quite unprecedented for the Fed.