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Thursday, March 19, 2020

The Fed Props Up Money Funds

Reported by Neil Anderson, Managing Editor

As the coronavirus pandemic and its effects continue to spread, the country's lender of last resort is trying to boost a certain type of mutual fund.

Eric S. Rosengren
Federal Reserve Bank of Boston
President, CEO
Yesterday, the board of the Federal Reserve created a Money Market Mutual Fund Liquidity Facility (MMLF). The Fed team likens the program to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) that it created in 2008, during the financial crisis, and shut down in 2010.

Barron's, Bloomberg, Reuters, and the Wall Street Journal all reported on the news.

"The Money Market Mutual Fund Liquidity Facility is a reaction to large redemptions in prime MMFs last week," writes Credit Suisse analyst Craig Siegenthaler, who covers asset managers.

"The Global Money Market Funds Outlook has been revised to negative from stable, owing to unprecedented market volatility and economic uncertainty amid the coronavirus pandemic," writes the team at Moody's. "Over the last few days, the US prime institutional money market fund segment has lost more than 10% of total portfolio assets. This sharp rise in daily outflow rates has reduced funds' liquidity levels and placed downward pressure on funds' NAVs."

Through MMLF, the Boston Fed will lend money to banks to buy securities from prime money funds, to keep those funds liquid. The program is backed by $10 billion of credit protection from the Treasury Department. (By comparison, from 2008-2010 the Fed pumped $217 billion into money funds, all of which was paid back. 

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