WASHINGTON (AP) — The Federal Reserve said it would seek to hold down spiking interest rates in the state and municipal bond markets by supporting banks’ purchase of the bonds.
The Fed said Friday that it would loan money to banks that banks would then use to purchase highly rated municipal bonds from money market mutual funds or from municipal bond funds. The goal is to stabilize the $3.8 trillion municipal bond market and ensure that states and cities and other public entities, including hospitals, can borrow at low cost. Without the ability to borrow, local and state governments could be forced to lay off workers.
The Federal Reserve Bank of Boston is conducting the transactions and is doing so by expanding the Money Market Mutual Fund Liquidity Facility, an emergency program it launched Wednesday.
The MMLF was first used during the 2008 financial crisis, but its expansion to include municipal bonds is a new step that wasn’t taken back then.