Fed Announces New Plan to Help Money Market Funds

President Bush speaks to reporters at the Central Louisiana Chamber of Commerce in Alexandria, La., Monday, Oct. 20, 2008. (AP Photo/Charles Dharapak)

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First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy.

A week after the government announced it would spend $250 billion to buy stakes in U.S. banks, the Fed stepped up Tuesday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings. Meanwhile, the Treasury named two accounting firms to help manage the $700 billion bailout package.

Treasury Secretary Henry Paulson said Tuesday night that the government would do whatever it takes to deal with the credit crisis but he cautioned that economic troubles caused by the crisis are likely to persist "for a number of months."

"Through a multitude of powerful actions we have and will demonstrate our commitment to unlocking our credit markets and minimizing the impact of the current instability on the rest of the U.S. economy," Paulson told a New York audience.

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The government is trying to combat the worst credit crisis in seven decades, an upheaval that has destabilized Wall Street and raised fears that the country could tumble into a deep recession.

The Fed said it would provide up to $540 billion in financing to money market mutual funds in a new program called the Money Market Investor Funding Facility.

"The government is doing everything it can to break the logjam," said Mark Zandi, chief economist at Moody's Economy.com. "If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations."

JPMorgan Chase & Co. was chosen to run five special funds that will buy from money market mutual funds certificates of deposit, bank notes and commercial paper, which is short-term debt companies issue to raise money for payroll or supplies.

Money market funds hold about one-third of commercial paper.