Fed lowers pricing for emergency loans to state, local governments

The Federal Reserve lowered pricing for emergency loans to state and local governments to meet financial needs during the pandemic. Yahoo Finance's Brian Cheung joins Zack Guzman to discuss.

Video Transcript

ZACK GUZMAN: Meantime, want to give the update in terms of the Federal Reserve trying to change things there as they have struggled to get their relief out the door on the front of trying to help out localities, US states and cities across the country, changing the way that they are getting their aid to those areas out now. For more on that, I want to get to Yahoo Finance's Fed reporter, Brian Cheung, who has the details. Brian.

BRIAN CHEUNG: Well, Zach, as you mentioned, the Federal Reserve making some changes to the municipal liquidity facility that it originally launched back in April. It got live in May. But since that point in time, the Federal Reserve has only used up about $1.2 billion of that $500 billion of commitments that it can support through this facility, which it uses to offer loans to municipalities that have been really struggling during this COVID-19 crisis. Keep in mind a lot of these local municipalities and states have essentially no tax revenue coming in, which leaves them with a pretty large gap, as we've discussed many times on this show, in their budget. So the Federal Reserve offering these loans. But the criticism was that the low uptake was because these loans were simply too expensive.

So the Federal Reserve announcing after the market closed yesterday that it was going to lower the pricing of the loans on the municipal liquidity facility by 50 basis points. The way that this works is that for certain types of notes that the municipalities would pledge to this facility, the Fed would offer the loan with an interest rate-- it's not free-- an interest rate that's usually pegged around the overnight index spread in addition to a 150 to up to 700, basically, basis point addition based on the credit rating of the borrower.

So let's say, for example, you are a highly rated AAA issuer. You are able to get a loan at OIS plus 150. Now the Federal Reserve has lowered that to 100 basis points, so a little cheaper. But it remains to be seen what the uptake in this is going to be. And Zack, you do wonder to what degree, maybe, the Federal Reserve's decision here was because of the faltering on Capitol Hill to fail to get that phase four deal, at least for right now, for more support to those states and local municipalities.

ZACK GUZMAN: Yeah. We know that's a sticking point, and it doesn't seem like any progress, whether it's that issue or any of the other plethora-- the plethora of issues that Republicans and Democrats are debating right now-- not a lot of progress on any of them. But when we also look at the Fed's thinking in terms of where the economy goes from here, we got the update from Boston Fed President Eric Rosengren about what he's thinking and how this is directly tied to the pandemic, something we've heard from Fed Chair Jerome Powell as well. But I guess it's the same thinking no matter who you ask at the Fed.

BRIAN CHEUNG: Yeah. Well, Boston Fed President Eric Rosengren has been a little bit more vocal than the other Fed officials over his concerns about failing to contain the virus. We already know the Fed, including Jerome Powell, the chairman of the Fed, saying that really, you need to contain the virus first before you can start worrying about whether or not we can ensure that economic rebound. But Rosengren saying this morning, quote, "the inability thus far to control the virus in the United States is resulting in renewed restrictions on individuals and businesses in many parts of the country," end quote.

He was using the rest of his speech that he made this morning to warn of the fact that the failure to contain the virus was really going to trip up any sort of hope that we could have for recovery-- not necessarily spelling doom and gloom for the second half of this year, but saying people need to be mindful of this. The implications of this, obviously, quite large for Fed policymakers and fiscal policymakers still trying to get that phase four deal done.

ZACK GUZMAN: Absolutely. And we'll continue to watch that. But the latest there from Yahoo Finance's Brian Cheung. Appreciate that.