Fed lowers interest rates for Municipal Liquidity Facility

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The Federal Reserve Board on Tuesday reduced the interest rates it charges for its Municipal Liquidity Facility.

The program — authorized in March's Coronavirus Aid, Relief, and Economic Security Act — was created to ensure municipalities had market access amid the turmoil created by the coronavirus pandemic.

The Federal Reserve announced a 50 basis point cut for Municipal Liquidity Facility loans.

Illinois thus far is the only municipal issuer to use the program, borrowing $1.2 billion in June. The Fed is authorized to buy up to $500 billion of notes.

The revised pricing the Fed announced Tuesday afternoon reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes.

"Today's changes will ensure the MLF continues to provide an effective backstop to assist U.S. states and local governments as they weather the pandemic," the Fed said in its statement.

The rates the Fed charges are on a sliding scale based on the issuers' bond ratings.

Its relatively high spreads limit the program's appeal for issuers; they have by and large been able to get lower rates in the open market.

That is the way it's designed, the Fed's Kent Hiteshew said in May.

“The MLF pricing has been established to serve as a backstop, not as a first stop,” he said then.

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