WASHINGTON — The Federal Reserve announced yesterday that it will allow an emergency program for money market fund investors to expire and that it is trimming others that are no longer necessary now that financial market conditions have begun to improve.
At the same time, some of the Fed’s emergency programs will be extended until Feb. 1, instead of expiring as had been planned in October, officials told reporters during a conference call.
“Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time,” the Fed said in a release.
The Fed announced that it will not extend the Money Market Investor Funding Facility beyond its planned Oct. 30 expiration. The facility was expanded to include state and local government investment pools in January.
Fed officials told reporters that they are allowing the program to expire because it was not used at all and the needs of the market will be met by two other programs: the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF, and the Commercial Paper Funding Facility, both of which will be extended to Feb. 1.
AMLF usage has declined considerably as market conditions have improved, officials said, adding that the Fed will nevertheless establish additional criteria for its use. A money market mutual fund would now need to experience “material” outflows — defined as at least 5% of net assets in a single day or 10% of net assets within the prior five days — before it can sell asset-backed commercial paper that would be eligible collateral for AMLF loans to depository institutions and bank holding companies. “The redemption thresholds are to “ensure that the AMLF is used for its intended purpose,” the Fed said
Fed officials said they waited a day after the conclusion of the Federal Open Market Committee meeting to announce the changes because they needed to coordinate the extension of currency swap lines with other central banks.
The Fed also said it would extend through Feb. 1 dollar-liquidity swap arrangements with 13 other central banks and foreign currency swap arrangements with three central banks. The Bank of Japan, however, is still considering extensions of the dollar liquidity swap and the foreign currency liquidity-swap arrangements with the Fed.