Fed will back up money market funds, to unfreeze lending

WASHINGTON -- The Federal Reserve on Tuesday announced it will provide backup financing for the money market mutual fund industry, the latest in a series of steps aimed at getting credit moving again.

The Fed said it would set up a Money Market Investor Funding Facility (MMIFF), which will be used to back up a private-sector initiative to provide liquidity to U.S. money market funds.

Money market funds, which have $3.4 trillion in assets, are a key source of cash for credit markets.

They invest for short terms in securities such as certificates of deposit or commercial paper issued by companies and government agencies.

The funds, which try to keep their share prices at a dollar, were previously considered ultra-safe. But in recent weeks some have run into unexpected stress as investments have soured. They have been reluctant to make new investments because they were not sure they could sell their holdings if they needed to raise cash for redemptions.

The Fed's move Tuesday aims to make sure they have a place to re-sell the commercial paper they buy.

The Fed says $500 billion has fled money market funds since August, most of that institutional money invested in prime money funds, which are most likely to buy commercial paper.

By improving conditions in money markets, the Fed hopes to help banks and other financial firms better meet the credit needs of businesses and households.

Under the new program, the Fed will be the senior funders of a series of special purpose vehicles. That financing should enable an industry-supported private-sector group to buy assets from the funds and, perhaps "over time" other investors, the Fed says.

The assets will include U.S. dollar-denominated certificates of deposit and commercial paper set to mature in 90 days or less, issued by highly rated financial institutions.

The Fed noted that short-term debt markets have been under considerable strain in recent weeks, as money market mutual funds and other investors have had difficulty selling assets to pay worried investors who have withdrawn money.