FPI Comments on Federal Reserve Action

April 17, 2020

Recently, the Federal Reserve took a welcome step forward for states struggling in the wake of the pandemic by creating a new way to lend money directly to states and municipalities.  Through the Municipal Liquidity Facility, New York and other states struggling with a sudden drop-off in much-needed revenue can now access the funds needed to cover essential services.

While this is helpful in the short-term, states will need to borrow until their revenues recover. And that would require the facility to be expanded: loan terms — which are now up 24 months — should be extended, loans must be cheaper, and more municipalities should be made eligible.

FPI’s chief economist, Jonas Shaende submitted comments to the Federal Reserve on the new policy and emphasizing the need for future action.

“The creation of the Municipal Liquidity Facility is a welcome and much needed first step in the right direction. New York State is projected to face a historic revenue shortfall of almost 13 percent of the state’s budget. The delay of the federal tax filing date for three months amplifies the problem brought about by the sudden stop due to the COVID-19. The Federal Reserve is in the position to play an important role in stabilizing the economy.”

“To be successful and effective, the Fed must leverage its board and the community of regional experts to build appropriate oversight mechanisms. The lending standards, practices, and outcomes must be regularly disclosed for public information and commentary. States and municipalities dealing with the drastic economic contraction must be given access to zero-rate loans and origination fees must be waived for all qualified borrowers. The function of the new facility must be evaluated after a reasonable time in operation, with a view to extending lending terms and providing borrowers with options to roll over their debt.  Additionally, smaller municipalities and their authorized agents must be granted equal access to the facility.”

The Fiscal Policy Institute encourages the Federal Reserve to engage in a complimentary counter-cyclical monetary policy at the state and local level to help our communities withstand the crisis.”

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