WASHINGTON (AP) -First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy.

A week after the government announced it would spend $250 billion to buy stakes in U.S. banks, the Fed stepped up Tuesday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings. Meanwhile, the Treasury named two accounting firms to help manage the $700 billion bailout package.

There’s still more action to come as the government expands efforts to deal with the credit crisis that has destabilized Wall Street and raised fears that the country could tumble into a deep recession.

The Fed said it would provide up to $540 billion in financing to money market mutual funds in a new program called the Money Market Investor Funding Facility.

“The government is doing everything it can to break the logjam,” said Mark Zandi, chief economist at Moody’s Economy.com. “If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations.”

JPMorgan Chase & Co. was chosen to run five special funds that will buy from money market mutual funds certificates of deposit, bank notes and commercial paper, which is short-term debt companies issue to raise money for payroll or supplies.

Money market funds hold about one-third of commercial paper.

Fed officials said that about $500 billion has flowed out of prime money market funds since August as investors worried about their ability to redeem shares. On Sept. 18, the Treasury Department announced it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts.

The Fed has already announced that starting next Monday it will begin making direct purchases of commercial paper in a further effort to bolster this market.

Also Tuesday, the Treasury Department announced that it had selected two major accounting firms to help manage the government’s $700 billion rescue program for the financial system.

The department announced that Ernst & Young would receive an initial contract for $492,000 to provide accounting services, and Pricewaterhouse Coopers would get nearly $191,500 to set up internal controls for the part of $700 billion program that will focus on buying distressed real estate assets from banks as a way to encourage new lending.

The government could select later this week the five to 10 asset-management firms that will supervise the government’s purchases of distressed home mortgages and securities backed by those loans.

The program is initially expected to spend $100 billion of the $700 billion bailout package on those purchases. Another $250 billion will be used by the government to buy stock in hundreds of banks to bolster their reserves, another effort to unfreeze the credit markets.

The initiatives seem to be having a positive effect. Yields on Treasury bills and the interest rates banks charge to other banks have both fallen back to late-September levels.

But Wall Street pulled back Tuesday as investors decided to cash in some of the big gains of the previous session. The Dow Jones industrial average fell 231.77 points, a retreat following a gain of 413 points on Monday.

Analysts said the stock markets were reacting with caution because they expect further turmoil stemming from credit markets that appear to be thawing, but only at a slow pace.

“Interest rates and spreads have come down, but we are not anywhere close to normal,” said David Wyss, chief economist at Standard & Poor’s in New York.

The latest announcements came as the House Financial Services Committee held a hearing Tuesday to hear from economists and industry leaders about what needs to be done to overhaul government regulations so that the current crisis is not repeated.

House Financial Services Committee Chairman Barney Frank, D-Mass., said his panel would offer legislation in the next Congress that could be the most sweeping changes to the government’s financial regulatory system since the 1930s.

“These are historic decisions being made. It is as important a set of economic decisions I think this country will be making since the Depression,” Frank said.

Democrats in Congress are also pushing ahead with efforts to assemble a second economic stimulus program that could total $150 billion or more, a proposal that got a timely endorsement on Monday from Federal Reserve Chairman Ben Bernanke, who warned that the country could be facing a pronged stretch of economic weakness.

White House Press Secretary Dana Perino told reporters Tuesday that the nation would probably “see a lot of tough times ahead.” She said the administration would consider proposals for increased economic stimulus, but that ideas put forward so far by Democrats were more “campaign talking points” than legitimate efforts to bolster the economy.

“Right now, what we’re focusing on is the urgent crisis at hand, which is to stop the bleeding, the get rescue package implemented so that we could unfreeze the credit markets,” Perino said.

Democrats say any stimulus bill would include items previously rejected by Bush such as road and bridge construction money, and help for state budgets. Another round of tax rebates is possible, too, to make the measure big enough to jolt the economy, which many economists think has already slipped into recession.

—

Associated Press writers Jeannine Aversa, Deb Riechmann, Madlen Read and Andrew Taylor contributed to this report.

AP-ES-10-21-08 1831EDT