October 27, 2008 / 12:58 PM / 11 years ago

UPDATE 2-Fed sets rates in commercial paper program debut

(Adds PIMCO’s Gross comments)

NEW YORK, Oct 27 (Reuters) - The Federal Reserve set the interest rates it will charge companies for the commercial paper it will buy from them in a debut program, the New York Fed said on Monday.

The Commercial Paper Funding Facility, announced on Oct. 7, is aimed at helping cash-squeezed corporations. The companies have long relied on commercial paper sales to raise short-term funds for daily operations.

Amid the financial crisis, many money market mutual funds — a critical class of commercial paper investors — stopped buying these corporate IOUs.

The Fed said it will charge 1.88 percent for unsecured commercial paper and 3.88 percent for asset-backed commercial paper, the New York Fed said on its Web site.

The Fed’s CPFF program will buy 30-day commercial paper rated at least A-1/P-1/F1 by the major bond rating agencies.

Last week, General Electric (GE.N), one of the top-rated U.S. commercial paper issuers, said it plans to tap the CPFF.

The government’s backstop to the $1.4 trillion CP market should bring down in other key areas of the money markets such as unsecured interbank lending, analysts and investors said.

Bill Gross, chief investment officer at Pacific Investment Management Co. (Pimco), told CNBC on Monday the London Interbank Offered Rate (Libor), a global rate benchmark, should fall as the Fed sets its average CP purchase rates below it. For more, see [ID:nWEN9584]

Three-month Libor on dollar was fixed at 3.50750 percent USD3MFSR= on Monday, down from 3.51625 percent on Friday. For more, see [ID:nLR330306]

Libor “can’t stand at this level,” Gross said on CNBC.

Short-term dollar lending rates also could decline this week on an expected interest rate cut by Fed policy-makers at the end of a two-day meeting on Wednesday.

On Monday, traders have fully priced in the chance the Fed will lower the target rate on federal funds, the overnight cost banks charge each other to borrow surplus reserves, to 1.00 percent from the current 1.50 percent, according to interest rate futures. (Reporting by Richard Leong. Editing by Walker Simon)

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