Via Financial Times

The US Federal Reserve increased its efforts to shore up financial markets late on Wednesday by setting up a facility that would make loans to banks secured by assets from money market mutual funds. 

The move comes as the US central bank deploys a number of measures to try and limit the fallout to markets and the economy from the coronavirus outbreak, which has brought many parts of the American economy to a standstill and raised fears of a damaging recession. 

Since Sunday, the Fed has slashed its main interest rate close to zero, announced that it would be starting large-scale asset purchases and revived two lending facilities from the 2008 financial crisis to help shore up liquidity in the credit markets.

The new backstop facility — called the Money Market Mutual Fund Lending Facility (MMLF) — was announced in a bid to help that money markets operate smoothly in the face of large-scale redemptions from investors searching for cash in the midst of the market turmoil. 

“Money market funds are common investment tools for families, businesses, and a range of companies,” the Fed said in a statement. “The MMLF will 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 US central bank said the facility — to be managed by the Boston Fed — was similar to a tool it used during the 2008 financial crisis to prop up money market funds, but it would be purchasing a broader range of assets.

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The Fed move on Wednesday night followed steps taken day earlier in quick succession to revive two other 2008 crisis facilities. The first amounts to a backstop for commercial paper markets — another linchpin of capital markets — and the second was a lending facility for primary dealers. These are the largest financial institutions that purchase government debt, secured against a wide range of assets, including highly rated corporate debt, municipal bonds and equities. 

“Banks are at the centre of the Fed’s efforts to prevent financial market credit stresses from becoming a full-blown systemic financial crisis,” economists at Jefferies wrote in a note. “The challenge is to utilise the banking system, which remains relatively healthy, to get credit to nonbank financial institutions, households and businesses that need access to credit,” they said. 

This week’s steps by the Fed to resurrect the facilities it created a decade ago were taken in co-ordination with the US Treasury, which had to approve the measures. “This will allow banks to immediately provide liquidity to Money Market Mutual Funds,” Steven Mnuchin, the US Treasury Secretary, said in a statement, adding that his department would provide $10bn in credit protection to the Boston Fed for the programme. 

As well as facilitating Fed action to prop up financial markets, Mr Mnuchin is also leading the Trump administration’s negotiations with Congress for a fiscal stimulus package that could exceed $1tn, including direct transfers to US households.

Separately, on Wednesday, Australia’s central bank cut interest rates to a record low of 0.25 per cent and launched a series of monetary policy measures, including quantitative easing and a A$90b ($50bn) business lending facility. South Korea also announced a series of economic measures, including a Won50tn ($39bn) emergency financing plan for small and medium-sized enterprises and a war chest to stabilise the country’s bond and equity markets.