The Fed said its new lending facility would assist money-market funds ‘in meeting demands for redemptions by households and other investors.’
Photo: Andrew Harrer/Bloomberg NewsThe Federal Reserve said Wednesday it would launch a new lending facility to backstop the money-market mutual-fund sector as part of a broadening effort to calm turmoil sparked by the novel coronavirus epidemic.
The Fed’s latest facility, called the Money Market Mutual Fund Liquidity Facility, will make loans available to eligible financial institutions backed by high-quality assets purchased by the institutions from money-market mutual funds.
In a statement, the Fed said the facility would 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 made the announcement late Wednesday after companies and investors braced for a prolonged economic stall on Wednesday, sparking a rush for cash that took the recent market turmoil into a new, more troubling liquidation phase.
Investors sold nearly everything they could in the most all-encompassing market drawdown since the 2008 financial crisis. Short-term money markets at the heart of the financial system saw strains while large companies drew heavily on credit facilities.
The Fed has moved aggressively this week to protect strains in funding markets from aggravating what is already likely to be a severe halt to economic growth. While businesses are already laying off or furloughing employees, the damage could spread if companies fail because they don’t have access to credit.
The Fed on Sunday cut its benchmark interest rate to near zero and has pledged to buy at least $700 billion in Treasury securities and mortgage bonds.
The facility is the third announced by the Fed this week created by citing emergency powers to extend credit, following earlier efforts to backstop the market for short-term commercial debt and to expand lending to so-called primary dealers, the large financial institutions that function as the Fed’s exclusive counterparties in markets.
Those facilities required the approval of Treasury Secretary Steven Mnuchin. The Fed said it would receive $10 billion to cover potential losses from the Treasury from its Exchange Stabilization Fund.
The latest facility could prove controversial because after the 2008 financial crisis, when the Treasury Department used the ESF to backstop money-market funds, Congress restricted its authority to do so again. The Trump administration is asking Congress for authority to develop guarantee programs for the $4 trillion money-market mutual-fund industry, The Wall Street Journal reported earlier Wednesday.
Large losses by a money-market fund in September 2008 accelerated the financial crisis that followed the failure of Lehman Brothers Holdings Inc., leading investors to pull more than $200 billion from prime funds—a type of money-market fund—over the next two days. U.S. officials created a temporary money-market guarantee to calm investors, who generally consider money-market funds as safe as cash.
The landscape of money funds has changed dramatically since the 2008 crisis, with more money now parked in stable options that mostly hold short-term Treasury debt and other government securities. Funds that invest in riskier, short-dated commercial paper hold about $1 trillion in assets, according to Crane Data LLC, publisher of Money Fund Intelligence.
Prime money-market funds, which buy commercial debt, are a source of lending to American corporations, but they can stop buying debt and even sell assets when investors speed up withdrawals.
Investors pulled about $66 billion from those funds in the past week, Crane Data shows, while money has flowed into funds that hold government debt.
In 2014, the Securities and Exchange Commission approved rule changes partly intended to change investor psychology toward the funds. The riskiest ones—those buying corporate debt and catering to institutional investors—had to adopt a floating share price, making it more apparent to investors that they could suffer losses.
Other SEC measures were meant to help money funds weather periods of turbulence, including freezing redemptions and imposing fees on investors who withdrew their cash during stressed markets. But the risk of losing access to one’s money can also speed a stampede if investors think a fund will try to limit outflows.
Write to Nick Timiraos at nick.timiraos@wsj.com
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