Document Type
Case Study
Case Series
The Federal Reserve's Financial Crisis Response
JEL Codes
G01, G28
Abstract
During the summer of 2007, the U.S. residential mortgage market began to decline sharply negatively impacting the asset-backed commercial paper (ABCP) market, which often relied on mortgages as underlying support. Money Market Mutual Funds (MMMFs), significant investors in commercial paper (CP), quickly retreated from the market, causing a substantial decline in outstanding ABCP. In September 2008, pressures on the markets severely escalated again, when the Reserve Primary Fund MMMF “broke the buck” and prompted run-like redemption requests by many MMMF investors. These disruptions resulted in higher rates and shorter maturities, practically freezing the market for term CP. Concerned about the impacts on the financial system and possible spillover to the greater economy, the Federal Reserve (the Fed) invoked its emergency powers to implement (i) the Asset-Backed Commercial Paper Money Market Fund Mutual Liquidity Facility (AMLF) and the (ii) the Commercial Paper Funding Facility (CPFF), which collectively provided more than $1 trillion dollars to MMMFs and CP issuers and helped shore up the ABCP market, preserve the MMMFs, and eventually stimulate the CP market. This case discusses the two facilities and also demonstrates the interconnectedness between financial markets, the possibility of contagion that this creates, and how this proved challenging for the Fed in fighting the crisis.
Recommended Citation
Wiggins, Rosalind Z. and Metrick, Andrew
(2020)
"The Federal Reserve’s Financial Crisis Response D: Commercial Paper Market Facilities,"
Journal of Financial Crises: Vol. 2
:
Iss. 2, 116-143.
Available at:
https://elischolar.library.yale.edu/journal-of-financial-crises/vol2/iss2/5
Date Revised
2020-10-08
Included in
Economic History Commons, Economic Policy Commons, Finance Commons, Macroeconomics Commons, Policy Design, Analysis, and Evaluation Commons, Policy History, Theory, and Methods Commons