The Federal Reserve announced it will begin purchasing short-term debt through a new facility in an attempt to bolster financial institutions that have been hammered by recent volatility in the credit markets. 

Long-time market observers noted the extraordinary measures the Fed has taken in recent months in an effort to stem the worsening global credit crisis. 

“By creating a vehicle to purchase assets and then lending to that vehicle, the Fed has greatly expanded the scope of their responses to the ongoing financial crisis,” said JPMorgan’s US economist Michael Feroli.  

The new facility, called the Commercial Paper Funding Facility, will act as a liquidity backstop to U.S. issuers of commercial paper, according to the Fed. This move allows the Fed to start taking in large quantities of difficult-to-value securities that have been plaguing credit markets. 

“The commercial paper market has been under considerable strain in recent weeks,” the Fed said in a release. “The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy.” 

This move marks the first time the central bank will actually buy debt of private corporations. Generally it just uses that debt as collateral for loans made to banks and more recently investment banks. The Treasury Department will place a special deposit at the Federal Reserve to help finance these purchases, the release said. 

“Through the creation of the facility the Fed hopes to unclog the (commercial paper) market, bringing (interest) rates down,” Goldman Sachs said in a research note. 

This action comes as part of a wide-ranging plan by U.S. regulators to shore up the financial sector and credit markets.  

The Fed said yesterday it would begin paying interest on bank reserves, and dramatically step up lending to investment banks through its Term Auction Facility. 

Economists said while these efforts may ultimately be helpful, a more concerted effort by global central banks is necessary to entirely thaw out the frozen credit markets   

John Ryding, chief economist at RDQ Economics, said, “The central banks can create all the liquidity they want. But people aren’t lending that liquidity out because of a lack of confidence in who you’re lending it to.”