The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.
The initiative announced Tuesday is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses after the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.
“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington.
A Fed official said that about $500 billion has flowed out of prime money-market funds since August. Those and other money-market mutual funds control $3.45 trillion.
JPMorgan Chase & Co. will run five special units that will buy up to $600 billion of certificates of deposit, bank notes and commercial paper with remaining maturities of 90 days or less. The Fed will provide up to $540 billion, with the remaining $60 billion coming from commercial paper issued by the five units to the money- market funds selling their assets, central bank officials told reporters on a conference call.
Turmoil worsened among money-market funds after the bankruptcy of Lehman Brothers on Sept. 15 and the breakdown of the oldest money-market fund the following day.
