Fed rolls out new $540 bn aid to financial sector

Fed rolls out new $540 bn aid to financial sector

Washington: The US Federal Reserve reached deeper into the troubled financial system, offering up to $540 billion of help to money market mutual funds in its latest response to the credit crunch.

Under a new programme, the Fed offered the funds for an initiative led by the private sector to buy highly rated short-term debt, including certificates of deposit and commercial paper, from money market investors.

The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks due to a lack of investors willing to take the risk of buying them.

The new program “adds another tool to the Fed’s arsenal as it attempts to unclog the credit markets," wrote analyst Ryan Sweet on Economy.com, a website run by the Moody’s rating agency.

“The new facility is needed as it broadens the Fed’s moves to improve the commercial paper market."

Disruption in the market for commercial paper threatens companies, which issue the securities to raise cash for short-term needs such as salaries.

The plan “should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments," the Fed said in a statement.

The central bank has created the Money Market Investor Funding Facility (MMIFF), which will provide financing to five private sector facilities to buy the assets, each managed by bank JPMorgan Chase, Fed officials said.

The purpose of a money market fund is to provide investors with a safe place to invest in short-term, low-risk assets that earn a steady return and can be easily sold to raise cash.