Fed Gearing Up to Help to Smaller Local Governments

on Apr21
by | Comments Off on Fed Gearing Up to Help to Smaller Local Governments |

But as the coronavirus plunges the economy into a steep downturn, causing growth to swan dive in a way unseen since the Great Depression, Mr. Powell and his colleagues have been breaking all of their own rules — taking a “move fast and save the economy” approach, despite the consequences that might follow.

Congress specifically directed the central bank in the CARES Act response package to try to help out state and local governments. The Fed complied weeks later, and its initial, hastily formed pass at the municipal bond market relied on simplistic cutoffs: Officials pledged to buy from counties with more than two million people or cities with more than one million, and from states.

That left out heavily black cities like Atlanta and Baltimore, based on a Brookings Institution analysis, and touched off prompt criticism.

“Congress made no distinction regarding the size of a municipality that should directly benefit from such a program,” Representative Maxine Waters, Democrat of California and the chairwoman of the Financial Services Committee, wrote in a letter on April 16 poking holes in the program’s design.

Other lawmakers have followed her in calling for more. Democratic senators including Elizabeth Warren of Massachusetts and Mr. Schumer sent a letter to Mr. Powell on Saturday “expressing serious concern with the arbitrary population thresholds used to determine eligibility.”

Senator Michael D. Crapo, Republican of Idaho, the chairman of the Senate Banking Committee and one of Mr. Powell’s key bosses, pointed out in a letter that as it stands now, “no city or county in Idaho would qualify, which precludes rural communities from receiving significant and critical assistance.”

Such concerns will probably draw a response before long, Ian Katz, an analyst at Capital Alpha, wrote in a note on Sunday.

“The complaints about the reach of the Municipal Liquidity Facility seem like common sense and probably won’t be ignored,” he wrote. That said, the outpouring of questions “may end up vindicating those at the central bank who view this as fiscal policy that Congress should decide.”

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