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Fed jumps in for money-market funds

Federal Reserve Chairman Ben Bernanke

TEXT OF STORY

Kai Ryssdal: But first, the Fed.
Mr. Bernanke and company announced today they're going to start buying commercial paper from money market funds. Just by way of refresher here, those money markets are a key source of liquidity, gee, where've you heard that word before, in the short-term credit markets. Our senior business correspondent Bob Moon reports.


Bob Moon:
Another day and only another $540 billion committed by the Federal Reserve. Finance professor Dan Seiver at San Diego State University says the goal is the same: The central bank is trying to melt more of the ice that's still gripping the credit markets.

Dan Seiver: You know, every day they have a new program. The idea is, they keep throwing stuff on this to try and thaw it out. And I guess whatever it takes, whatever it does to their own balance sheet, they're willing to do it.

The Fed's new focus is on money-market mutual funds, which get cash from investors and then lend it out. But recently they've been hoarding it, because customers have been demanding their money back. The Fed reports investors have pulled half a trillion dollars out of money-market funds in just the past couple of months.

In the rush to pay their investors back, funds had to sell investments at a loss. Seiver says they are in danger of losing so much, customers could get back less than a buck for every dollar they put in.

Seiver: The Fed is trying backstop that by saying, 'Okay, you don't have to dump these on the open market. We'll take them, and we'll give you cash for it. And then you can meet your redemptions, and you don't have to worry about the potential for 'breaking the buck."

And perhaps more important, keep lending.
The central bank's focus now seems to be moving beyond the big banks to other areas of the credit freeze. And Seiver hopes it signals the Fed is finally getting ahead of the curve.

In Los Angeles, I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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