Fed creates facility to buy commercial paper

By Mark Felsenthal and Glenn Somerville

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday said it would begin buying the short-term debt many companies use to fund their day-to-day operations, its latest emergency move to try to restore credit flows and protect the economy.

The central bank is creating a facility to buy commercial paper because investors such as money market mutual funds have increasingly shied away from this form of corporate debt, a damaging economic development.

"The volume of outstanding commercial paper has shrunk, interest rates on longer term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day," the Fed said in announcing the program with the blessing of the U.S. Treasury.

The Treasury believes the Commercial Paper Funding Facility is necessary to prevent "substantial disruptions" to financial markets and the economy, the Fed said.

To support the facility, the Treasury will make a deposit of funds at the New York Federal Reserve Bank, with Fed officials saying the size of the deposit would be substantial.

Officials said the program, which will buy only top-rated commercial paper, would be up and running soon but probably not in a matter of days. Its size would depend on details yet to be worked out with financial market participants, Fed staff told reporters.

Of $1.75 trillion in commercial paper outstanding in August, eligible issuers accounted for $1.3 trillion. But the central bank does not intend to buy anywhere near that amount, the officials said.

UNSECURED DEBT