Rashida Tlaib, Alexandria Ocasio-Cortez and other House Democrats signed a letter urging the Federal Reserve to do more to support state and local governments, adding to criticism that the central bank is being too cautious in some of the programs it has put in place to help the economy during the pandemic.
“Our States and our cities are already anticipating unprecedented and catastrophic budget deficits”, according to the letter, shared with The New York Times ahead of its release Thursday. He urges the Fed chairman, Jerome H. Powell, to lower the rate applied on loans the central bank grants to holders of municipal bonds to near zero, while extending the debt repayment period to at least five years.
The central bank is buying municipal bonds, something Powell has long refrained from doing because he feared he would run the risk of picking winners and losers. The Fed has restricted the pool eligible borrowers and made the terms unattractive. Only Illinois has chosen to use the program to date, given its pricing.
The Fed typically charges relatively high rates in its emergency lending programs because it tries not to compete with private capital. But the role of the central bank has faded during the coronavirus crisis. For example, it now buys corporate bonds and offers loans to midsize companies, backed by Congressional funding provided to the Treasury Department to protect the Fed from losses. These programs have been difficult to run as a backup option and in some cases provide credit alongside the private market rather than as a last resort.
The Democrat’s letter – led by Ms Tlaib, Pramila Jayapal, Joe Neguse and Mark Pocan – argues that the central bank is offering more favorable lending terms to businesses than to state and local governments.
But it is difficult, if not impossible, to make a comparison between the terms of corporate programs and those of the municipal facility, because the programs and markets they aim to help are radically different.
“The loan conditions are not particularly generous”, Charles evans, the president of the Federal Reserve Bank of Chicago told reporters this week, referring to the municipal program. “It would make sense for many states and local governments to wait and see what the parameters of budget support really are. “
Mr Evans said lowering the interest rate might be a “sane thing to do,” but noted that the programs were worked out in conjunction with the Treasury Department.
“Sometimes there are differences of point of view there,” he said. Cash has generally been more risk averse than the Fed in creating emergency facilities.