Keep the Fed Out of Municipal Finance

by Thomas L. Hogan
The American Institute for Economic Research

The Federal Reserve has taken extreme actions in response to the coronavirus outbreak and lockdown. In addition to purchasing more than $2 trillion worth of US Treasuries and mortgage-backed securities, the Fed has created a variety of emergency lending programs which were previously only used in times of severe financial crisis.

Among the most controversial of these is the Municipal Liquidity Facility (MLF), which provides funding for state and local governments, a task the Fed has traditionally avoided. Under the MLF, the Fed will provide funds directly to state and local governments in exchange for newly-issued municipal bonds. The Fed has posted a list of eligible borrowers that includes all 50 states, the District of Columbia, and more than 100 US cities and counties, as well as “certain multistate entities.”

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