Question

1. What is commercial paper/ Who issues it? Why/ What specific policy measures has the Federal Reserve taken as a result of the Corona Virus epidemic that affect their market? Why?

Answer 1

COMMERCIAL PAPER

Commercial paper is a short term debt instrument issued typically to meet the working capital requirements of a concern. It is issued at a discount as an unsecured instrument by large corporations. Since it is an unsecured instrument, only firms with good debt ratings find buyers without having to offer a high discount for the debt issue.

Because the denominations of the commercial paper are usually $100,000 or more. This is because commercial paper is issued by large institutions. The main buyers are other corporations, financial institutions, high net worth individuals and money market funds. It is an unregistered instrument making it a cost-effective source of short term fund.

Federal Reserve Policies on the advent of Corona Virus epidemic

In order to maintain economic stability by maximum employment and price stability in the challenging times of COVID 19, the Federal Reserve has come up with several policies.

(1) In order to support the smooth functioning of the market and effective transmission of monetary policy to broader financial conditions, the Committee will continue to purchase treasury securities. It has been decided that $500 billion of Treasury securities will be bought over the coming months. This has been done to support the flow of credit to households and businesses.

(2)The Committee will continue to closely monitor the current market conditions so it can assess the pace of its securities purchases at future meetings. Also, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. This has been done to ensure that the supply of reserves is smooth and to support the functioning of short-term U.S. dollar funding markets.

(3) Agency commercial mortgage-backed securities are also facing stress and so to restore the smooth functioning of this market, they will also purchase in the least $200 billion of agency mortgage-backed securities over coming months. This is done to ensure that the borrowers in the economy are not impacted heavily and the credit can flow continuously.

(4) To guard the US Economy against the oversees market strains, the Federal Reserve maintains swap lines with five major central banks. What happens is these central banks contain the pressures of dollar funding in their jurisdictions (overseas) and thus prevent them from impeding the flow of credit here at home.

Above are some of the several policies undertaken by Federal Reserve.