The US Federal Reserve has announced it will set up a Special Purpose Vehicle (SPV)) to buy Commercial Paper directly to unfreeze this key market for large corporates who are struggling to get refinancing from banks. The Reserve Bank of New Zealand has previously said it will accept Commercial Paper in its open market operations, but the facility has not been used yet. This effectively means the US Federal Reserve is now the lender of last resort for US banks and for large US corporates. With the inter-bank markets shut down, the Federal Reserve has taken the role of the nation's bank. Its balance sheet has more than doubled in the last month to almost US$1 trillion. The full announcement is here. Earlier the Federal Reserve announced it would start paying interest on deposits in its accounts by banks and set the rate below the current 2% Fed Funds Rate, implying a loosening of monetary policy. Chairman Bernanke gave a speech that most interpreted as a hint of further rate cuts Meanwhile the Dow closed down more than 500 points or 5% at under 9,500. European markets closed flat.
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