Fed plans to buy commercial paper to ease credit crunch

The Federal Reserve announced it is going to buy massive amounts of commercial paper in an effort to break through a credit crunch that has endangered the economy. ┬á In alliance with the Treasury Department, the Fed is planning to buy ÔÇ£commercial paper,ÔÇØ a way of borrowing money for short periods typically ranging from a day to less than a week, and a mechanism that many companies use to finance their day-to-day operations, such as purchasing supplies, finance payrolls, and other cash needs. ┬á The rescue comes as the credit clog hits the short-term investment market, a trade that has nearly shut down making it increasingly difficult and expensive for companies to obtain the short-term loans needed to fund their operations. ┬á This lending freeze, a key reason why the US economy is faltering, leaves companies with a high cost to borrow, causing employees to cut jobs and reduce capital investments.┬á In conjunction with the business loan purchases, the Fed announced Monday it will provide nearly $900 billion in cash loans to struggling banks in order to further ease credit stresses and to encourage nervous consumers and businesses to spend more freely again. ┬á ÔÇ£Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit,ÔÇØ the Fed said in a statement. ┬á The Fed hopes that ÔÇ£by eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper operations, this facility should encourage investors to once again engage in term lending in the commercial paper market.ÔÇØ┬á The Fed did not give an estimate as to how much commercial paper it would by, but announced today that it would continue to look for other ways to alleviate liquidity strains.