WASHINGTON _ The Federal Reserve late Wednesday said it was launching a program to support money market mutual funds as the coronavirus continues to ripple through the financial system.
The Money Market Mutual Fund Liquidity Facility, established under the Fed's emergency authority, echoes a version that was set up during the global financial crisis. The Treasury Department will provide $10 billion of credit protection.
Earlier Wednesday, the U.S. Treasury Department had proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News.
"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 program worth 750 billion euros ($820 billion) to calm markets and protect the euro-area economy. Also, at the same time as the Fed announcement, the Reserve Bank of Australia said it was cutting its benchmark rate by a quarter point to 0.25%.
In the U.S., money funds have been under stress as investors have rushed into cash. Households, businesses and other institutions use money funds to park cash they may need in the short term. Reforms to the industry passed in 2016 forced a tiering of investments into funds with differing levels of safety and segregated retail customers from institutional.
Similar steps were taken during the global financial crisis to shore up money funds when a run on them helped cripple credit markets. Under Treasury Secretary Henry Paulson, the department guaranteed more than $3 trillion of fund holdings against losses for almost a year using its Exchange Stabilization Fund.
Money market mutual funds proved a crucial weak spot in 2008 after the industry's largest fund, the Reserve Primary Fund, suffered losses on debt issued by investment bank Lehman Brothers. When its share price fell below the stable $1 promised to customers, investors began scrambling out of most other money funds, forcing their managers into a fire sale of assets.
