So why is the stock market up this morning? Because the Fed released a plan under which they will become direct purchasers of term commercial paper.
CP, loosely, is a short-term borrowing (less than 270 days) by creditworthy businesses, and it’s unsecured more than half of the time. (Sometimes it’s secured by assets.) Over the last three weeks, issuance of CP has been severely impaired, primarily because the institutional money-market funds that are the key buyers of CP have been holding cash out of the market.
I haven’t read the Fed’s plan yet, but I’ll update this when I do. In essence, it appears that the Fed will literally step into the shoes of the private market and fund the short-term borrowings of American businesses.
The Fed is a bank now. Nothing like this has ever happened before.
How big? Well, the total CP market is more than $1.5 trillion, but the vast majority of that is in financial businesses and insurance. The industrial segment of the market is somewhere in the neighborhood of $300 billion. That’s the part that everyone wants to backstop, because it directly addresses recent fears that perfectly healthy businesses might start failing to meet payrolls due to lack of capital.
So what’s the question you’re asking? What will the rates of interest be? How can the Federal Reserve set the market for term financing without swamping signals from free markets?
Very good questions. At this point, the only available answer is Yes.
Updates as events warrant.