REVISED PRICING: Federal Reserve Board Lowers Interest Rates for Municipal Liquidity Facility

Posted on 08/12/2020

As state and city governments encounter significant revenue shortfalls due to the coronavirus lockdown, the Federal Reserve is trying to use its powers to ease the fiscal pain, as Congress remains paralyzed in negotiations. Until the coronavirus pandemic, the Federal Reserve never intervened in state and local financial markets. To deal with a liquidity crisis in the U.S. municipal market in March, the Federal Reserve backed financial institutions by allowing state and local debt to be used as collateral through the Money Market Mutual Fund Liquidity Facility. By April 2020, the Federal Reserve created the Municipal Liquidity Facility. The current Municipal Liquidity Facility will only buy short-term municipal debt at above market rates.

The press release states, “The Federal Reserve Board on Tuesday announced revised pricing for its Municipal Liquidity Facility (MLF). The revised pricing reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes.

Today’s changes will ensure the MLF continues to provide an effective backstop to assist U.S. states and local governments as they weather the pandemic.

The MLF was established under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. It offers up to $500 billion in lending to states and municipalities to help manage cash flow stresses caused by the coronavirus pandemic.”

Keywords: Federal Reserve System.

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