Fed Must Backstop State Finances Too, Says Influential Democrat

(Bloomberg) — The Federal Reserve should get creative in its response to the economic threat posed by the coronavirus outbreak and consider extending financial support to state and local governments, Democratic lawmaker Maxine Waters said.

“The Fed appears to be using its old playbook in trying to calm funding markets by flooding them with liquidity. During this time of economic turbulence, it is critical that the Fed go beyond these steps and provide much-needed support to those who are on the front lines of this pandemic,” Waters, the California congresswoman who chairs the House Financial Services Committee overseeing the U.S. central bank, said Monday in a statement.

“For example, state and local governments may soon face funding pressures and need assistance as they address this public health emergency,” she said.

Late Sunday, the Fed announced it would slash its benchmark interest rate to zero and pump liquidity into the banking system by purchasing hundreds of billions of dollars of government bonds and mortgage-backed securities on the open market. The moves were reminiscent of those deployed in 2008 to fight the last financial crisis.

Waters is not the first Democrat on the House Financial Services Committee to raise the possibility of central bank support for municipal finances in recent months. Michigan Democrat Rashida Tlaib pressed Fed Chair Jerome Powell to consider doing so in the future during his semi-annual congressional testimony in February.

U.S. central bankers possess authority under the Federal Reserve Act to buy municipal obligations maturing in six months or less, though they have rarely exercised it in the past. The present crisis poses an opportunity for the Fed to boost the efficacy of its stimulus by intervening directly in the municipal bond market, according to Skanda Amarnath, director of research at Employ America.

“This is already a significant enough crisis in terms of how it will test the capacity constraints of public health systems across the country,” Amarnath said in a proposal published Sunday. “State governments should not have to simultaneously worry about financial market collateral damage depleting increasingly scarce fiscal resources.”

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