Clash Over Municipal Loan Program Delays Stimulus Report

The Fed, for its part, has pointed out that the mere existence of the program has helped calm the market for municipal debt, so that states and localities have been able to sell bonds at extremely low interest rates. The Fed is not supposed to supplant willing private lenders, according to the legislation that enabled its emergency powers.

“Our mandate is to serve as a backstop lender to accomplish these objectives — not as a first stop that replaces private capital,” Mr. Hiteshew said last month at the oversight commission’s hearing. The program “has contributed to a strong and rapid recovery in municipal securities markets.”

He added that state and local governments and other municipal bond issuers could issue securities with interest rates that are “at or near historic lows.”

Democrats counter that the Fed is doing more to help lower the interest rates at which corporations borrow money than it is for state and local governments.

One of the Fed’s corporate programs buys bonds directly and is akin to the municipal program. It, too, charges high interest rates, and, partly as a result, has never been used. But the central bank has a second program that buys corporate debt that has already been issued, either through exchange-traded funds or according to a preset index.

That program was announced early in the pandemic, when the corporate bond market was struggling. But it has bought bonds in the months since, even after borrowing costs for businesses dropped sharply — something officials characterized as follow-through on their promise. The purchases have slowed to a trickle in recent months.

The Fed and Treasury never established a similar program to buy up existing municipal bonds. If one had been, it might have lowered already-low borrowing costs in the municipal market, but that might not do much to help governments that are facing the most stress because their revenues have tumbled or they are legally prohibited from running budget deficits.

Article source: https://www.nytimes.com/2020/10/09/business/congress-municipal-loan-oversight-coronavirus.html