On Tuesday, the Fed introduced the Commercial Paper Funding Facility to purchase three-month unsecured and asset-backed commercial paper directly from issuers.

"This is a huge development," said T.J. Marta, fixed income strategist from RBC Capital Markets. "The economy has been experiencing the equivalent of a stroke as short-term funding has been completely blocked. This endeavor should largely eliminate the blockage that we had expected would continue through yearend if policymakers did not act."

Equity futures rallied and Treasuries sold off immediately after the announcement. Overnight U.S. commercial paper yields fell to 2.94% from 4.57%, according to Bloomberg.

But the upswing in sentiment was short-lived as stocks later turned negative and Treasury yields declined. Investors want more details about the program, including how much the Fed will spend.

"It is important for the Federal Reserve to publish more details rapidly," said Matthias Huth, bond market analyst at Landesbank Baden-Wurttemberg. "Until the release of further details of the program, we stick to our cautious view regarding the U.S. economy and the financial crisis."

The commercial paper market has shrunk by more than $200 billion in the past three weeks, led by financial commercial paper, but the market is still worth $1.6 trillion, according to economists at Capital Economics.

"The latest figures on commercial bank lending suggest that some firms have been able to turn to their banks to draw on pre-arranged lines of credit," wrote senior U.S. economist Paul Ashworth. "If the Fed and the Treasury are forced to fund large parts of the commercial paper market then this new program could potentially become more expensive than the $700bn TARP."

The Fed and other central banks have unveiled a series of measures to improve bank-to-bank lending but have so far had limited success. On Tuesday, overnight U.S. dollar LIBOR was up 1.57 percentage points to 3.94%.

Economists at RDQ Economics said the facility will allow the Fed to act as the purchaser of last resort, but they still expect additional action.

"We still believe that G7 central banks should guarantee all interbank loans for the period of at least one year to inject confidence into the money markets," wrote RDQ economists John Ryding and Conrad DeQuadros in a client note.

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