The Federal Reserve of the United States has rolled out its third emergency credit programme in two days, announcing it would make loans to banks to support money market mutual funds, a common investment tool for many US citizens and businesses.
The Money Market Mutual Fund Liquidity Facility (MMLF), rolled out on Wednesday night under the Fed’s emergency authority, echoes a version that was set up during the global financial crisis. The Treasury Department will provide $10bn of credit protection.
The new facility through the Boston Federal Reserve bank will offer “support for the flow of credit to households and businesses” by ensuring the $3.8 trillion money market mutual fund industry can sell its holdings of US Treasury bonds and other high-quality assets at full value if investors ask to withdraw their cash.
Money market funds typically comprise short-term debt instruments known as commercial papers, which pay out earnings in the form of dividends. While they are typically considered low risk, these funds have come under recent stress as investors rushed to sell off the securities for cash.
These funds are also not insured like bank deposits by the Federal Deposit Insurance Corporation, and one of the darkest moments of the 2008 financial crisis occurred when the Reserve Primary Fund collapsed because of soured investments in Lehman Brothers commercial paper.
“Money market funds are common investment tools for families, businesses, and a range of companies,” the Fed said in its 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 Fed’s action comes hours after the European Central Bank’s late-night emergency decision to launch an extra emergency bond-buying programme – also known as quantitative easing – worth 750 billion euros ($820 billion) to calm markets and protect the euro-area economy.
At the same time as the Fed announcement, the Reserve Bank of Australia (RBA) said it was cutting its benchmark rate by a quarter percentage point to an all-time low of 0.25 percent in an out-of-schedule policy meeting.
The RBA said the board would not tighten policy again until it achieves its employment and inflation goals. It planned to use quantitative easing measures for the first time to help blunt the economic fallout from the coronavirus pandemic.
“A priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly,” the RBA said in a post-meeting statement.
It set a target for the yield on three-year Australian government bonds of about 0.25 percent, which it aims to achieve by buying bonds in the secondary market beginning Friday.
The RBA will also provide a three-year funding facility to the country’s banks at a fixed rate of 0.25 percent. Banks will be able to obtain initial funding of up to 3 percent of their existing outstanding credit.
“They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least A$90bn ($50.2bn),” the RBA added.
Earlier, the RBA used its daily market operation to pump a record 12.7 billion Australian dollars ($7.08bn) into the banking system, aiming to ease liquidity constraints in a stressed bond market.
The RBA reiterated it would continue to provide liquidity for the financial markets.
However, the measures barely helped, as the Australian dollar collapsed to $0.5510, the lowest since late 2002 while the hefty sell-off in the bond market continued. The Aussie was last down 3.2 percent at $0.5584 while yields on three-year government bonds were last at 0.485 percent, nearly double the RBA’s target.