The Federal Reserve Board on Tuesday said it would directly inject funding into the middle of frozen credit markets with the creation of a Commercial Paper Funding Facility (CPFF). The move immediately began to ease availability and cost of short term commercial loans. It also set off a rally in stocks upon opening of the markets.

The Fed said the CPFF will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers though a mechanism called a Special Purpose Vehicle (SPV). The Fed said it will provide financing to the SPV, 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.

"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities," said the Fed in a statement. "As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day."

It continued, "By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market."

The stock markets opened up, with the Dow Jones Industrial Average up 130 points. But by 10 a.m., the rally had begun to fade and the major indices were turning negative.