By Nick Timiraos
The Federal Reserve revamped two lending programs Friday in a bid to ease funding strains that have threatened to aggravate a sharp slowdown from the coronavirus pandemic.
In the first such change, the central bank said it would accept highly rated municipal debt with terms of up to one year in a new lending facility unveiled earlier this week that helps money-market mutual funds raise cash in order to meet redemptions they are facing.
When the Fed unveiled the program on Wednesday night, it hadn't included municipal debt as accepted collateral for that facility. The change could help alleviate rising rates on certain types of municipal debt that have jumped in recent days.
The Fed said Friday that the facility wouldn't accept variable-rate demand notes or tender option bonds, but that the "feasibility of adding these and other asset classes to the facility will be considered in the future."
The new facility will extend risk-free loans to banks, which can then purchase the assets of money funds and deposit them as collateral at the Federal Reserve Bank of Boston, which is running the program.
The Fed's move to shore up money funds came after many were unable to easily sell their holdings of short-term corporate debt to meet large volumes of shareholder redemption requests, according to industry lawyers. Illiquidity in the commercial-paper market also made it difficult for the funds to comply with post-financial crisis rules requiring them to hold set quantities of liquid assets.
The Fed also said Friday it would ramp up a program with five other foreign central banks to increase the frequency of operations that are designed to make U.S. dollars available overseas at near-zero interest rates.
The Fed initially unveiled these "swap" lines with five central banks in Canada, Europe and Japan on Sunday. The central banks said Friday they would conduct seven-day maturity operations daily rather than weekly, and that they would continue to offer an 84-day maturity operation weekly.
Many business transactions take place outside of the U.S. in dollars and foreign institutions also lend in dollars. The Fed used these tools aggressively in 2008 and 2009 to alleviate strains in funding markets.
"The swap lines among these central banks are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad," the Fed said in a statement Friday.
Write to Nick Timiraos at email@example.com