The Wilder View

What do Fed policy and the commercial paper market have in common?

Normally nothing. But we are not in normal times – whatever that may mean – and the Fed is propping up the commercial paper market via its new liquidity facilities, the Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCP MMMF). In just seven short weeks, the Fed has added 69% of the entire third quarter’s loss in net-issuance of commercial paper. Some would say that the Fed IS the commercial paper market right now.

The Fed released its flow of funds statistics yesterday, and I listed my initial findings in this post. Furthermore, the report indicates that the commercial paper market is struggling.

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The chart illustrates the quarterly total net new issuance of (flow) and total outstanding (stock) commercial paper over the last six years, 2002:Q3 to 2008:Q3. This includes all types of commercial paper, nonfinancial and financial. The size of the commercial paper dropped in the third quarter to $1.56 trillion and the total net issuance over the quarter fell $508 billion.

The Fed is single-handedly propping up the commercial paper market

In response to a shrinking credit system, the Fed initiated several new liquidity facilities over the year – eight to be exact – including those for the commercial paper market, CPFF and ABCP MMMF. The new facilities increased the Fed’s balance sheet by $1.4 trillion to $2.2 trillion, where the magnitude of the liquidity facilities are are massive (you can view the balance sheet here):

  • The Term Auction Facility (TAF) currently stands at $448 billion, or 20% of bank reserve credit (size of the Fed’s balance sheet). The size of the TAF rivals the Fed’s stock of Treasuries, which has dwindled to just 22% of the Fed’s balance sheet.
  • Other Federal reserve assets, which is mostly comprised of currency swaps is now $628 billion, or 28% of the balance sheet.
  • The Commercial paper facilities (CPFF + ABCP MMMF) have extended a net $349 billion, $41 billion under the ABCP MMMF and $309 billion under the CPFF, which is 16% of the Fed’s balance sheet.


The chart illustrates the Fed’s net purchase of commercial paper through the CPFF and ABCP MMMF liquidity facilities since October 29, 2008 (the beginning of the liquidity programs). On December 10, 2008, the Fed had increased their net holdings of commercial paper by $349 billion. In just 7 short weeks, the Fed has offset 69% of the $508 loss net-issuance of commercial paper over the third quarter of 2008.

The Fed is ostensibly shoring up the commercial paper markets. I imagine that the Fed will continue to intervene in this market until the CPFF’s termination date, April 30, 2009. It is obvious, though, that credit markets still have a ways to go until they are considered healthy.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

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