Fed launches credit program to support money market mutual funds

US, WASHINGTON (ORDO NEWS) — The US Federal Reserve has launched its third emergency loan program in two days to tackle the effects of the viral crisis. The new program aims to support the operation of $ 3.8 trillion of money market mutual funds in case investors quickly withdraw funds.

The mechanism introduced on Wednesday will provide loans for up to 1 year to financial institutions that pledge such high-quality assets as US Treasury bonds purchased from money market mutual funds.

In fact, the Fed encourages banks to buy assets from these funds, isolating them from the need to sell assets at a discount in the event of pressure from households or companies wishing to cash out.

Money market mutual funds are designed to be a low-risk place for storing household and corporate cash; they limit investments to high-class assets such as government bonds and commercial papers.

Despite the fact that last week there were no widespread buybacks from money market funds and the total assets of the funds increased by almost $ 94 billion, investor demand for cash is growing.

And “if markets like this last many days or weeks, things could change,” said Peter Crane of Crane Data – Money Fund Intelligence.

The Fed said it would exclude any assets purchased from money market mutual funds from regulatory capital requirements, giving banks another incentive to buy fund assets if necessary.

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