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October 21st, 2008

Fed Increases Their Credit Initiative

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The Federal Reserve announced today the creation of the Money Market Investor Funding Facility (MMIFF), a federal unit designed to promote the private purchase of commercial paper from money market mutual funds. The MMIFF is the latest in a string of initiatives designed to unfreeze the credit markets. Short-term lending especially has suffered through the credit crunch.

Commercial paper is a critical form of short-term lending relied upon by many businesses to finance their daily operations such as paying bills and employees:

By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments.  Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.

In essence, the MMIFF is another tool that will make borrowing money easier for both businesses and consumers.

This means that investment companies can have a way to trade commercial paper holdings with the Fed in exchange for cash, so they are able to meet th e demands of investors who want to get out of these money market holdings. This should help investment firms to keep from “breaking the buck” which can happen if a sudden “rush to the exits” occurs.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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