Federal Reserve Extends Lending to Smaller US Cities and Counties

April 28, 2020 by Dan McCue

WASHINGTON – The Federal Reserve is expanding the eligibility criteria for a lending program intended to support the municipal bond market to allow small U.S. cities and municipalities to access needed funds from the central bank.

The loosening of lending from the $500 billion fund comes at a time when there is an increased focus on states and local municipalities experiencing deep revenue losses as a result of the coronavirus outbreak.

House Democrats have been pushing for significant relief funding for small cities and counties to be included in the economic stimulus bill now being negotiated in Congress.

Republicans on Capitol Hill have been resisting. Mitch McConnell, the Republican Senate majority leader, suggested states should go bankrupt instead.

However even if the Democrats prevail, no one knows when the bill will be adopted, especially now that the House has postponed its return to Capitol Hill indefinitely.

The Fed’s decision, coming on the eve of the two-day meeting of its Federal Open Market Committee, appears intended to fill the gap by revising a loan program created only a few weeks ago.

The Municipal Liquidity Facility, which was announced on April 9 as part of an initiative to provide up to $2.3 trillion in loans to support U.S. households, businesses, and communities, offered up to $500 billion in lending to states and municipalities to help manage cash flow stresses caused by the coronavirus pandemic.

Under the original terms of the program only states, the District of Columbia, cities with a population of 1 million or more and counties with at least 2 million residents could participate.

The Fed now says the program will be open to counties with at least 500,000 residents and cities with at least 250,000 residents.

“The new population thresholds allow substantially more entities to borrow directly from the MLF than the initial plan announced on April 9,” the Central Bank said in a statement. “The facility continues to provide for states, cities, and counties to use the proceeds of notes purchased by the MLF to purchase similar notes issued by, or otherwise to assist, other political subdivisions and governmental entities.

“The expansion announced today also allows participation in the facility by certain multistate entities,” it added.

The Fed also said it would expand the list of securities eligible for the program, agreeing to buy short-term notes that mature in 36 months or less. Previously, it had agreed to buy notes maturing in 24 months or less.

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