Fed creates new facility to assist money market funds

"This is a financial crisis that has required the Fed to try unconventional tools, to think 'outside the box,' and the money market facility is consistent in that regard," Wang said. "We are seeing redemptions of money market deposits by hedge funds and money market funds' inability to sell back at par the commercial paper they bought, so the Fed's facility should increase liquidity for money market funds."

Concerning consumer protection, Wang said the U.S. Treasury already guarantees money market funds against losses, establishing a $50 billion fund for that purpose in September.

An alphabet soup of facilities

The MMIFF joins other facilities established by the Fed: the Commercial Paper Funding Facility (CPFF) and the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). Earlier, the Fed established the Term Auction Facility (TAF), and the Term Securities Lending Facility (TSLF).

Monetary Policy & Economic Analysis: As economist Wang noted, the new facility should lower tension levels in the short-term debt market. It should allay concerns that certain money market funds may not have adequate liquidity to fund withdrawals, if another bank fails and/or another stressor event hits the markets. Wang added that he doesn't expect the Fed to use all of the $540 billion designated for the MMIFF facility.