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Fed would grant up to $540B to money market funds
(Agencies)
Updated: 2008-10-22 00:07

Money-market mutual funds invest in short-term corporate and government debt that typically carries low risks. The funds are popular places to park cash temporarily but still keep it accessible when needed. They typically earn higher interest than money-market accounts and savings deposits at banks, which are insured by the Federal Deposit Insurance Corp.

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Of the total $3.45 trillion held in money-market funds as of Friday, about $858 billion was in so-called "prime" money-market funds - the type that typically invest in commercial paper - according to fund-tracking firm iMoneyNet.

Although a total of nearly $6 billion flowed out of prime funds on Thursday and Friday of last week, the decline was far milder than it had been last month. For example, during the four-week period ended Oct. 3, assets in prime funds dropped by more than $514 billion, or about 25 percent, as investors switched to funds offering more security, such as those investing in government debt.

The Fed's announcement on Tuesday marked its latest effort to break through a credit clog that has hobbled lending and threatens to plunge the country into a deep and painful recession.

For about a month, the Fed has been making billions of dollars worth of loans to money market mutual funds - via banks - to help relieve pressures on the funds. And, in a separate program that launches on Oct. 27, the Fed will buy vast amounts of commercial paper from an array of companies. The flight of money funds and others away from commercial paper has left companies finding it harder and more expensive to raise short-term cash.

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