Fed announces unprecedented aid to state and local governments

(Image credit: Photo by OLIVIER DOULIERY/AFP via Getty Images)

The Federal Reserve announced a remarkable new step to combat the economic upheaval from the coronavirus pandemic Thursday morning: For the first time ever, it will lend directly to state governments, local governments, and municipalities, by buying up to $500 billion of the bonds they issue.

Since the start of American lockdowns to contain the virus, the Fed has announced a raft of new measures to provide cheap lending to the financial industry, corporations and businesses, all in an effort to keep the economy afloat. These included offers to buy limited categories of state and local bonds from secondary dealers and markets. But this new program will buy those bonds directly from the governments that issue them. For each individual government, the Fed will lend them up to 20 percent of their revenue for 2017; and in total the Fed will lend up to $500 billion. Thanks to a sign-off by the Treasury Department, the Fed will also buy bonds with a maturity of up to 24 months. (Under its own normal powers, the Fed is limited to buying state and local debt of six months or less.)

This is much further than the central bank ever went in response to the Great Recession. Various policymakers and activists have been pushing the Fed to cross this bridge for a while. States, localities, and municipalities cannot borrow from private markets the same way the federal government can, and when economic downturns hit their tax revenue, they’re forced to cut their spending. That dynamic made the hole from the 2008 collapse much deeper than it otherwise would have been. This morning’s announcement is an effort to prevent that from happening again.