Municipal market participants are confused, to say the least, about the Federal Reserve and its ability to buy long-term municipal securities. And there’s a good reason for the puzzlement.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act authorizes the Fed to purchase munis through a $454 billion Economic Stabilization Fund, and $150 billion is earmarked for direct federal aid to states and municipalities.
But, the language in the CARES Act is subject to interpretation, and can be misleading.
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Steven Skancke, chief economic advisor at Keel Point, isn’t convinced the law allows the Fed to buy longer-term munis.
The Fed, he said, believes “its mandate is limited to assuring liquidity on all debt markets.” And if the Fed thought the municipal bond market needed to be propped up, “it probably could find a way,” but for now the market seems to be functioning well.
Congress would need to be more “explicit” in authorizing the Fed to step into buying or supporting longer-dated munis beyond six-month maturities.
(Read more: The Bond Buyer)
