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Fed lowers pricing for emergency loans to state, local governments

Yahoo Finance’s Brian Sozzi, Alexis Christoforous, and Brian Cheung discuss the Federal Reserve’s latest move to reduce the price of emergency loans to states and cities.

Video Transcript

ALEXIS CHRISTOFOROUS: The Federal Reserve announced it lowered the price it charges US states and cities seeking short-term emergency loans. It's just the latest effort by the Fed to increase support to municipalities struggling during the pandemic. Yahoo Finance's Brian Cheung here with those details. Good to see you, Brian.

So give us the details here. How much is the Fed lowering the price of these loans?

BRIAN CHEUNG: Hi, Alexis. They'll be lowering it by 50 basis points. But let's not start putting headlines out there that says the Fed cuts rates by 50 basis points. Keep in mind, we're talking specifically about the Municipal Liquidity Facility. This is something that the Federal Reserve announced back in April, stood up in May to provide support, as you mentioned, to state and local governments that need to plug in any sort of budget shortfalls with essentially no tax revenue coming in because of COVID-19 pandemic.

Now originally, the Federal Reserve priced this facility in a fashion where they would effectively buy the municipal loans from the-- rather buy municipal debt directly from these municipalities, and then offer a loan with an interest rate. That interest rate would be something around the overnight index rate in addition to a spread. Originally, that spread was dependent on the credit rating of the borrower. So if you were AAA borrower, for example, it would be the OIS plus 150 basis points. The Fed now lowering that to 100 basis points.

So across the board, every type of credit borrower will be able to get these types of loans at 50 basis points cheaper than they were before the Fed made that announcement. That was yesterday in the afternoon. Again, the Federal Reserve hoping that this will increase the uptake of the Municipal Liquidity Facility.

Keep in mind, if you look at the numbers, the Federal Reserve has committed up to $500 billion in loans through this facility. But since it stood it up in May, it's only underwritten one loan, $1.2 billion, just a drop in the bucket to only one borrower. And that was the state of Illinois.

So the Federal Reserve saying in a statement that it hopes that it will be able to use that change that it made yesterday to increase the amount of assistance that it's offering to the state and local governments. For what it's worth, Evercore ISI's Krishna Guha writing in a note yesterday that they do expect that this change will increase the uptake. By how much, we don't really know. Alexis?