Fed to buy commercial paper to ease market turmoil

The Federal Reserve announced on Tuesday that it would begin buying commercial paper through a facility first used during the 2008 financial crisis, marking its latest effort to prop up dysfunctional financial markets.

The commercial paper market is a crucial source of funds for companies looking to raise cash for short-term needs.

Analysts at Bank of America said last week that the market had become “frozen”, as a rise in demand for cash collided with a pull back from the market by money market funds — one of the biggest buyers of commercial paper.

“The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak,” the Fed’s Board of Governors said in a statement.

“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.”

Exxon, Chevon and Toyota stand out as some of the biggest issuers of commercial paper held in money market funds, according to Crane data.