Fed to Lower Rates for Cities, States Seeking Short-Term Loans -- 2nd Update
By Nick Timiraos
The Federal Reserve said Tuesday it would reduce the rates it
charges cities and states seeking short-term loans from an
emergency lending program that has seen little takeup so far.
Changes to the program must be agreed upon by the Treasury
Department, which has approved $35 billion to cover losses on up to
$500 billion in loans extended by the Fed.
Municipal bond strategists and some Democratic lawmakers have
expressed disappointment in recent weeks over the degree to which
the Fed positioned the program as a backstop, though Fed officials
say the mere announcement of the program in April helped reduce
borrowing costs significantly for highly rated municipal
With Tuesday's changes, the Fed will reduce by 0.5 percentage
point the interest-rate spread on tax-exempt notes, and it will
also reduce the amount by which rates for taxable notes are
adjusted relative to tax-exempt notes.
The Fed is walking a careful line in a series of lending
programs it has created to backstop credit markets. It announced
the programs in late March and early April when many markets
weren't functioning well, but the announcement of those programs
has encouraged private investors to lend, reducing demand for Fed
That is raising difficult questions for the Fed and Treasury
over how aggressively to use money approved by Congress to
encourage additional lending. In June, the Fed tweaked its
corporate-debt lending program to actively purchase bonds from
nearly 800 eligible firms even if they haven't sought Fed help.
The Fed has repeatedly broadened the number of local governments
eligible for the lending program to allow more than 300 municipal
issuers. So far, the Fed has purchased only one such note. The
state of Illinois sold $1.2 billion of debt to the central bank in
June at a rate more than 1 percentage point below the rate at which
it was previously able to access markets in May.
Both the municipal program and a separate Fed program to jump
start corporate debt issuance have seen very little takeup. But
critics have said the lack of demand for municipal debt is a
problem because local governments are already responding to the
downturn with layoffs and cutbacks in services that could be
avoided if borrowing from the Fed's program were cheaper.
More than 50 House Democrats called on Fed Chairman Jerome
Powell in a letter last week to buy municipal debt of up to five
years, from the current limit of three years, and to reduce rates
to near zero.
"At present, the harsh terms and penalty rates for the [program]
make it functionally unusable for the vast majority of the state
and local governments that are technically eligible, which severely
undermines the program's intent to help states and cities
struggling from unprecedented financial hardship," the letter
Chicago Fed President Charles Evans said last week he was
sympathetic to that criticism but suggested the Treasury, not the
Fed, needed to also be convinced of the need for any changes.
"I do take the point -- I've heard it from others -- that it is
not a very attractive setting, so something that is a lower
interest rate would be more welcome," he said. Such lending
programs require a partnership with the Treasury, "and I think
sometimes there are differences of perspective there," Mr. Evans
For the highest-rated municipal borrowers, yields have returned
to their pre-pandemic levels and are now near all-time lows. But
yields on lower-rated securities are still somewhat higher than
before the pandemic.
Fed officials have said that demand for emergency credit from
the central bank could hinge on how much aid Congress provides
states in any future economic-relief legislation.
Talks over another round of fiscal help have broken down, and a
dispute over how much relief is needed for cities and states is at
the center of the impasse. House Democrats approved legislation in
May to provide $1 trillion in aid, but Senate Republicans last
month didn't include any such relief in their proposal.
"There is a tension that's brewing where the fiscal
follow-through is not really coming to fruition, so there needs to
be more thinking about how they can use the authority they have,"
said Skanda Amarnath, research director at Employ America, a
liberal advocacy group. "They're caught in a hard place."
Earlier measures have approved more than $200 billion, primarily
to address costs related to the coronavirus pandemic, but cities
and states face larger budget shortfalls because the virus has led
to big revenue declines on everything from sales tax receipts to
public transit fees.
"Getting liquidity is helpful, but it doesn't solve their bigger
problem, which is they have a fiscal hole," Dallas Fed President
Robert Kaplan said in an interview last month.
"They need grants, and if they don't get some fiscal relief,
they're going to need to cut back at a time when they're at the
forefront of trying to get schools reopened and...spend more on a
whole range of services in their states and in their communities to
help fight the virus."
Write to Nick Timiraos at email@example.com
(END) Dow Jones Newswires
August 11, 2020 18:43 ET (22:43 GMT)
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