Ray of light: Fed's commercial paper facility is off to a decent start

Posted Oct 29th 2008 3:00PM by Joseph Lazzaro
Filed under: International Markets, Federal Reserve, Financial Crisis

If the stock market is the thermometer of the economy, then the credit market is the life blood. And lately there are signs that the U.S. economy's circulatory system is improving.

Sales of commercial paper have increased considerably since the U.S. Federal Reserve launched its Commercial Paper Funding Facility (CPFF) to jump-start the corporate, short-term lending market, Bloomberg News reported Wednesday. Commercial paper sales totaled $67.1 billion on Monday, October 27, the first day of CPFF operation, and $41.6 billion Tuesday, compared with last week's daily average of $6.7 billion.

CPFF is working, so far

Economist David H. Wang told BloggingStocks Wednesday he likes what he's seeing regarding commercial paper flows this week.

"This is very encouraging, maybe our most important credit data point since the financial crisis started. The Fed's commercial paper facility is having its intended effect. If the trend continues, it points to a near-normalization of this critical market. Interest rates will be higher, but the fact that money is flowing is another positive step."

Short-term rates, including rates for commercial paper, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt, etc.

The commercial paper market all but froze in mid-September after Lehman Brothers filed for bankruptcy.

The Fed has established a series of lending and credit facilities that have added more than $1 trillion to the financial system -- and that's exclusive of bank rescue money approved by the U.S. Congress and administered by the U.S. Treasury. Still, economist Wang has no complaints with the Fed, 'leading the league in facilities,' to use a baseball metaphor.

"The goal is to keep credit flowing to enable businesses to function, which is intrinsic to economic activity," Wang said. "Given the de-leveraging occurring globally, there's little risk of re-igniting inflation. Most of the inflation that had existed in the U.S. was commodity price-based anyway, and it's now disappearing with commodity price declines."

Monetary Policy & Economic Analysis: The Fed's CPFF is one of the central bank's new, unconventional tools deployed to end the crisis. Look for more, creative tools from both the Fed and U.S. Treasury in the months ahead.

Tags: bond market, commercial paper, Commercial Paper Funding Facility, CPFF, credit markets, Fed, interest rates, inthenews, Lehman Brothers, monetary policy