Fed Acts, Dow Reacts

U.S. stocks opened on a higher note Tuesday in response to an announcement from the Federal Reserve that it would begin buying three-month unsecured and asset-backed commercial paper. According to a Market Watch report Tuesday morning, the Dow Jones Industrial Average (INDU) gained 61.73 points in response to the Fed’s announcement, though stocks had given up their gains just before lunchtime. The Dow was at 9,837.62, down 117.88 points, when this story was updated. The special purpose vehicle the Fed announced to buy up companies’ short-term debt will be funded through the newly-created Commercial Paper Funding Facility (CPFF). “By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said in a statement. “Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper.” It’s the latest step by the Fed to ease the burdened financial market, bolster liquidity and stimulate continued lending in a credit-frozen economy. Tuesday’s announcement came a full day after the Fed’s announcement Monday that it would begin paying interest on depository institutions’ required and excess reserve balances, giving the Fed “greater scope to use its lending programs to address conditions in credit markets.” The Fed also announced Monday an increase in the size of the Term Auction Facility (TAF) auctions, as well as a move to consult with market participants on ways to assist unsecured funding markets. “Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit,” the Fed said in Monday’s announcement. “The Federal Reserve stands ready to take additional measures as necessary to foster liquid money market conditions.” Despite the announcement, the Dow Jones industrials closed down Monday by over 350 points. During the day, they took a brief plunge of at least 800 points and fell below the 10,000 mark for the first time in four years, according to a Market Watch report. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade. Editor’s note: To contact the reporter on this story, email [email protected].

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