Fed to buy unsecured and asset-backed debt

WASHINGTON, Oct. 7 (UPI) -- The U.S. Federal Reserve said Tuesday it would buy unsecured and asset-backed three-month commercial paper to keep a crawling flow of credit moving.

The market for short-term debt used by banks, businesses and municipalities has "been under considerable strain in recent weeks as money market mutual funds and other investments, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper," the Fed said in a statement.

"As a result, the volume of outstanding commercial paper has shrunk," which has pushed up interest rates on longer-term debt "significantly," the Fed said.

The Fed said the Treasury would make a special deposit in the Federal Reserve Bank of New York to initiate the purchases.

As of Oct. 1, the market for short-term debt stood at $1.6 trillion, a drop of 11 percent from the first week of September, The New York Times reported.

The Fed said, "an improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households."

But the plan, which puts the Fed in a role that is closer to a direct lender to businesses, is fraught with legal difficulties, the Times reported.