In yet another effort to unfreeze credit markets, the Federal Reserve on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), allowing the central bank to purchase three-month unsecured commercial paper.

"The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers," the Fed said in a press release. "The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants."

Minneapolis Fed President Gary Stern (voter) says that while the move to bolster credit markets is needed, it has also exacerbated the "too big to fail" phenomenon. Delivering remarks at the Council of Institutional Investors on the 'Repercussion from the Financial Shock' in Washington, D.C., Stern said that if this issue goes unaddressed, it may become the source of a future shock.

Announcing ongoing co-ordinated efforts to provide U.S. dollar liquidity to the financial system, the Fed, European Central Bank, Bank of England, Bank of Japan, Swiss National Bank and Bank of Canada have all pledged to continue working together to provide additional liquidity to the financial marketplace.

In a bid to shore up its reserves, the Federal Deposit Insurance Corporation has come up with a proposal to double fees it charges banks to insure their deposits as a way to refill agency reserves. With the collapse of 13 banks in the U.S. this year, the federal deposit insurance fund has been drained. The reserves have fallen by 14% in the second quarter. The fund is "likely to experience further declines before recovering as the current problems confronting the banking industry bate," the FDIC said in a statement.

The Federal Reserve offered $150 billion from its Term Auction Facility (TAF) in an 85-day loan, which scored a stop-out rate of 1.39%. The Fed said 71 bidders offered a total of $138.092 billion in bids for the operation with a bid-to-cover ratio of 0.92. In separate operations, the European Central Bank added $20 billion in an 85-day TAF auction at a fixed rate of 1.39%, while the Swiss National Bank added $4 billion in an 85-day auction at an average rate of 4.45%.

The U.S. labour market took another turn for the worse, as job openings in the United States fell to 2.3% month-over-month in August, down from a 2.5% level in the prior month, the Bureau of Labor Statistics reported Tuesday. From August 2007, the openings rate has fallen from 2.9%. As of the last business day in August, there were 3.3 million nonfarm jobs available, according to the monthly Job Openings and Labor Turnover Survey.

Retail sales advanced 1.3% on an annual basis in the week ending Oct. 4, according to a weekly survey from the International Council of Shopping Centers (ICSC) and Goldman Sachs. Meanwhile, the Johnson Redbook retail survey recorded a 0.8% gain in the week compared to last year. "Overall, the month was very sluggish with a couple of pockets of strength - mainly among the value retailers catering to staples and basics," said Michael Niemira, chief economist at ICSC.

In a Wall Street Journal article published on Tuesday, Richmond Fed President Jeffrey Lacker (non-voter) said the U.S. economy is most likely in recession, but that monetary policy easing may not be the answer. "It looks pretty likely that this is going to be declared a recession," Lacker said. "So far, this has been a mild slowdown, but some of the things I was apprehensive about earlier in the year are weakening."

Similarly, Federal Reserve Bank of St. Louis President James Bullard said cutting interest rates is not the right way to solve a financial crisis, and that such actions do not accomplish anything during times of market volatility. Furthermore, he said he's worried that inflation concerns are being put "on the back burner" with all this talk of rate cuts.

In Canada, the Bank of Canada lent C$4 billion in a 28-day term purchase and resale agreement, in an effort to continue providing liquidity to the financial system. The operation drew a high yield of 3.925% and a low yield of 3.51%, for an average yield of 3.736%.

In Europe this morning, European Union finance ministers agreed to guarantee consumer deposits of at least €50,000, up from the previous level of €20,000, Luxembourg Finance Minister Jeannot Krecke told reporters following the finance ministers' meeting in Luxembourg. However, Krecke did note that countries could still set a maximum guarantee level at €100,000. "We have reiterated our determination to guarantee the stability and solidity of the banking system ... we have made this explicit and we are prepared to envisage all measures to attain this objective," said French Finance Minister Christine Lagarde.

Speaking later in the morning, European Central Bank Governing Council member Guy Quaden said the current financial turmoil is the worst seen since the 1930s, and is far from over. The financial system is in a crisis as a result of excessive risks taken, Quaden said at a parliamentary hearing in Brussels, Belgium on Tuesday, adding that the interest rate remained too low for too long in the U.S. The central banker told Parliament that he had not anticipated the severity of the crisis and stressed the need for European financial regulation.

In overnight news, the Reserve Bank of Australia surprised markets by cutting rates by a full percentage point on Tuesday to 6.00% from 7.00%. A consensus forecast had predicted the bank to cut by only 50 basis points to 6.50%. In his statement on monetary policy, RBA Governor Glenn Stevens said the unusually large move was due to recent changes occurring in the balance of risk, and a need to reduce borrowing costs.

Following the announcement from Iceland's central bank that it has entered into receivership and has been taken control of by Iceland's Financial Supervisory Authority, Russia said it has opened talks to lend the bank €4 billion in an effort to add needed liquidity into the financial system. According to Iceland's Landsbanki, the loan will last three to four years, at a cost of 0.5% more than the current Libor rate.

As was widely expected, the Bank of Japan kept rates on hold at 0.50% at its monetary policy meeting on Tuesday. The bank said the decision was unanimous and that its overall "sluggish" assessment of the economy was unchanged.

UK industrial production fell 0.6% in September, triple the 0.2% decline expected, the Office for National Statistics (ONS) reported. September's fall deepens the 0.4% decline seen in the previous period. On an annualized basis, industrial output fell 2.3% in September, down from both the 2.0% contraction expected and the 1.9% decline seen in August.

German factory orders surprised to the upside, rising 3.6% on a monthly basis in August, the German Economics Ministry said. Economists had expected a much more modest gain of 0.5% following July's 1.3% decrease, revised up from -1.7%.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it , Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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