Fed says to make loans to aid money market funds

Treasury Secretary Henry Paulson (3rd L) and Federal Reserve Chairman Ben Bernanke (2nd L) attend a closed meeting with House Speaker Nancy Pelosi (D-CA) and other congressional leaders on Capitol Hill, September 18, 2008.

WASHINGTON (Reuters) - The U.S. Federal Reserve on Friday announced more steps to aid battered markets, including opening its discount window to financial institutions to enable them to purchase certain assets from money market funds.

"One initiative will extend non-recourse loans at the primary credit rate to U.S. depositary institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds," the Fed said in a statement.

"This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP market and broader money markets," it said.

The U.S. central bank's move follows news earlier on Friday from the U.S. Treasury that it had set up a temporary guaranty program for the mutual fund industry. The measures were the latest in a series of dramatic steps to calm a spreading panic in credit markets following the record bankruptcy of Lehman Brothers Holding Inc and the government intervention in American International Group.

The Fed also announced more help for market in agency debt, which includes paper issued by mortgage giants Fannie Mae and Freddie Mac, which were seized by the government on September 7.

"To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks," the Fed said.

(Reporting by Alister Bull; Editing by Tom Hals)