Fed Backstops Corner of Municipal Debt Markets Amid Calls for Support

Among other things, the credit crunch means there are relatively few buyers for municipal bonds. As a result, yields on those securities have skyrocketed.

The timing couldn’t be worse for the municipal market to dry up. State and local governments have immense funding needs as they try to respond to the public health emergency posed by the virus, and tax revenues are expected to fall as workers lose their jobs.

Some lawmakers have been calling on the Fed to help. Representative Maxine Waters, the California Democrat who leads the House Financial Services Committee, has even proposed requiring the Fed “to support state, territory and local debt issuance in response to the coronavirus outbreak.” Senator Bob Menendez, a New Jersey Democrat, has proposed legislation that would let the Fed snap up local bonds of all maturities.

The central bank could legally buy very short-term municipal debt outright, based on the powers it is granted under the Federal Reserve Act. But it has avoided that path, partly because of the political implications. Doing so would amount to government finance, something central banks globally avoid.

“Munis are a whole different ballgame,” said Ernie Tedeschi, policy economist at Evercore ISI. “Now all of the sudden you run into problems about favoritism, regionalism and picking winners and losers.”

A group of state treasurers sent the Fed’s chair, Jerome H. Powell, a letter on Friday requesting that it use that authority anyway. The Democratic Treasurers Association wrote that “states are taking unprecedented actions to expand health care capacity” and that “at the same time, tax revenues are reducing and financial market turbulence could freeze the municipal bond market.”

“We are seeking the Federal Reserve’s support to ensure that financing constraints do not hinder the necessary response,” they said.

Article source: https://www.nytimes.com/2020/03/20/business/economy/federal-reserve-money-markets.html