Fed could snap up municipal debt under new senate proposal

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A Senate bill to be introduced Friday would allow the Federal Reserve to purchase municipal debt, in an effort to ease the economic strain of the coronavirus pandemic on state and local governments.

The measure from Senator Bob Menendez, a New Jersey Democrat on the Senate Banking Committee, would amend the Federal Reserve Act to allow the Fed to buy municipal bonds under “unusual and exigent circumstances.” The rule would be triggered by events like the rapid spread of a virus, other health emergencies or crises.

Senator Bob Menendez

“States and localities are on the front lines in the fight against COVID-19 and need assistance from the federal government to be able to finance the increasing costs of the response to this health emergency,” Menendez said in a statement. “The Municipal Bonds Emergency Relief Act would do that by allowing the Federal Reserve to provide support to state and local governments for this crisis and similar future emergencies.”

The bill, which does not have any Republican cosponsors, would allow the Fed Board to authorize Federal Reserve banks to purchase municipal bonds on the open market. Five or more members of the board would have to vote to enact the procedure for it to work.

The Fed is already partially authorized to buy municipal bonds. Under Section 14 of the Federal Reserve Act, it can buy municipal debt with up to 6 months of maturity. This would expand that authority to debt of “any maturity.”

The global health crisis has hammered municipal bonds as states and localities strain resources to prepare a medical response, help local businesses and suffer revenue losses as they ask people to stay at home.

Municipal bonds are headed for an 8% drop in March, their worst month of performance since 1981, according to Bloomberg Barclays indexes.

Bloomberg News