UPDATE 1-US Fed creates commercial paper-buying facility

Tue, Oct 7 2008, 13:31 GMT
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WASHINGTON, Oct 7 (Reuters) - The U.S. Federal Reserve on Tuesday announced the creation of a special-purpose facility with the Treasury Department's blessing to begin buying commercial paper in yet another emergency move aimed at calming chaotic financial markets.

The Fed said it was acting because money market mutual funds and other investors have become increasingly reluctant to buy commercial paper, which is widely issued to fund day-to-day business operations.

"The volume of outstanding commercial paper has shrunk, interest rates on longer term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day," the Fed said.

Treasury believes the facility is necessary to prevent "substantial disruptions" to the financial markets and the economy, the Fed said in a statement. Treasury will make a deposit of funds at the New York Fed to support the facility.

The Fed did not specify the size of the Treasury deposit.

(Reporting by Mark Felsenthal and Glenn Somerville; Editing by Walker Simon) Keywords: FINANCIAL/FED PAPER Keywords: FINANCIAL/FED PAPER

Mark Felsenthal and Glenn Somerville

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