Why the Fed is entering the commercial paper market
It seems as if the Fed is chartering new territory each day. Today’s territory: commercial paper.
Commercial paper is unsecured short-term debt that many banks and companies rely on to meet their short term cash needs. CP can be used for reasons ranging from daily expenses to stocking up seasonal inventories. CP is a money market security, as all issues mature in 270 days or less.
Defaults in the commercial paper market are few and far between, but any security with the words “unsecured” and/or “debt” in its definition is destined for disaster (at least in the short term).
The Fed has entered the CP market because liquidity needs to be restored. Banks do not want to make loans and those that are willing to loan are charging unaffordable rates. The Fed stepping into the CP market is a huge risk-reducer and should send rates back down to reasonable territory.
Until a substantial amount of fear subsides and a decent amount of liquidity is restored, look for further extension of the Fed’s creativity.
Even though the Fed has taken every step shy of another rate cut, the creativity hasn’t proven valuable in the stock market. The Dow, Nasdaq and S&P 500 were all down over 5 percent today.
Tags: commercial papter, Federal ReserveRelated Stories
POSTED IN: Corporate, Economy, Federal Reserve, Investment, Market, News, Uncategorized
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