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What did the Fed do in response to the COVID-19 crisis?

Brookings Institute

The coronavirus crisis in the United States—and the associated business closures, event cancellations, and work-from-home policies—triggered a deep economic downturn. The sharp contraction and deep uncertainty about the course of the virus and economy sparked a “dash for cash”—a desire to hold deposits and only the most liquid assets—that disrupted financial markets and threatened to make a dire situation much worse. The Federal Reserve stepped in with a broad array of actions to keep credit flowing to limit the economic damage from the pandemic. These included large purchases of U.S. government and mortgage-backed securities and lending to support households, employers, financial market participants, and state and local governments. “We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Jerome Powell, chair of the Federal Reserve Board of Governors, said in April 2020. In that same month, Powell discussed the Fed’s goals during a webinar at the Brookings’ Hutchins Center on Fiscal and Monetary Policy. This post summarizes the Fed’s actions though the end of 2021.


Easing Monetary Policy

  • Federal funds rate: The Fed cut its target for the federal funds rate, the rate banks pay to borrow from each other overnight, by a total of 1.5 percentage points at its meetings on March 3 and March 15, 2020. These cuts lowered the funds rate to a range of 0% to 0.25%. The federal funds rate is a benchmark for other short-term rates, and also affects longer-term rates, so this move was aimed at supporting spending by lowering the cost of borrowing for households and businesses.
  • Forward guidance: Using a tool honed during the Great Recession of 2007-09, the Fed offered forward guidance on the future path of interest rates. Initially, it said that it would keep rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” In September 2020, reflecting the Fed’s new monetary policy framework, it strengthened that guidance, saying that rates would remain low “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” By the end of 2021, inflation was well above the Fed’s 2% target and labor markets were nearing the Fed’s “maximum employment” target. At its December 2021 meeting, the Fed’s policy-making committee, the Federal Open Market Committee (FOMC), signaled that most of its members expected to raise interest rates in three one-quarter percentage point moves in 2022.
  • Quantitative easing (QE): The Fed resumed purchasing massive amounts of debt securities, a key tool it employed during the Great Recession. Responding to the acute dysfunction of the Treasury and mortgage-backed securities (MBS) markets after the outbreak of COVID-19, the Fed’s actions initially aimed to restore smooth functioning to these markets, which play a critical role in the flow of credit to the broader economy as benchmarks and sources of liquidity. On March 15, 2020, the Fed shifted the objective of QE to supporting the economy. It said that it would buy at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over “the coming months.” On March 23, 2020, it made the purchases open-ended, saying it would buy securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” expanding the stated purpose of the bond buying to include bolstering the economy. In June 2020, the Fed set its rate of purchases to at least $80 billion a month in Treasuries and $40 billion in residential and commercial mortgage-backed securities until further notice. The Fed updated its guidance in December 2020 to indicate it would slow these purchases once the economy had made “substantial further progress” toward the Fed’s goals of maximum employment and price stability. In November 2021, judging that test had been met, the Fed began tapering its pace of asset purchases by $10 billion in Treasuries and $5 billion in MBS each month. At the subsequent FOMC meeting in December 2021, the Fed doubled its speed of tapering, reducing its bond purchases by $20 billion in Treasuries and $10 billion in MBS each month.

Supporting Financial Markets

Lending to securities firms: Through the Primary Dealer Credit Facility (PDCF), a program revived from the global financial crisis, the Fed offered low interest rate loans up to 90 days to 24 large financial institutions known as primary dealers. The dealers provided the Fed with various securities as collateral, including commercial paper and municipal bonds. The goal was to help these dealers continue to play their role in keeping credit markets functioning during a time of stress. Early in the pandemic, institutions and individuals were inclined to avoid risky assets and hoard cash, and dealers encountered barriers to financing the rising inventories of securities they accumulated as they made markets. To re-establish the PDCF, the Fed had to obtain the approval of the Treasury Secretary to invoke its emergency lending authority under Section 13(3) of the Federal Reserve Act for the first time since the 2007-09 crisis. The program expired on March 31, 2021.

Backstopping money market mutual funds: The Fed also re-launched the crisis-era Money Market Mutual Fund Liquidity Facility (MMLF). This facility lent to banks against collateral they purchased from prime money market funds, which invest in Treasury securities and corporate short-term IOUs known as commercial paper. At the onset of COVID-19, investors, questioning the value of the private securities these funds held, withdrew from prime money market funds en masse. To meet these outflows, funds attempted to sell their securities, but market disruptions made it difficult to find buyers for even high-quality and shorter-maturity securities. These attempts to sell the securities only drove prices lower (in a “fire sale”) and closed off markets that businesses rely on to raise funds. In response, the Fed set up the MMLF to “assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.” The Fed invoked Section 13(3) and obtained permission to administer the program from Treasury, which provided $10 billion from its Exchange Stabilization Fund to cover potential losses. Given limited usage, the MMLF expired on March 31, 2021.

Repo operations: The Fed vastly expanded the scope of its repurchase agreement (repo) operations to funnel cash to money markets. The repo market is where firms borrow and lend cash and securities short-term, usually overnight. Since disruptions in the repo market can affect the federal funds rate, the Fed’s repo operations made cash available to primary dealers in exchange for Treasury and other government-backed securities. Before coronavirus turmoil hit the market, the Fed was offering $100 billion in overnight repo and $20 billion in two-week repo. Throughout the pandemic, the Fed significantly expanded the program—both in the amounts offered and the length of the loans. In July 2021, the Fed established a permanent Standing Repo Facility to backstop money markets during times of stress.

Foreign and International Monetary Authorities (FIMA) Repo Facility: Sales of U.S. Treasury securities by foreigners who wanted dollars added to strains in money markets. To ensure foreigners had access to dollar funding without selling Treasuries in the market, the Fed in July 2021 established a new repo facility called FIMA that offers dollar funding to the considerable number of foreign central banks that do not have established swap lines with the Fed. The Fed makes overnight dollar loans to these central banks, taking Treasury securities as collateral. The central banks can then lend dollars to their domestic financial institutions.

International swap lines: Using another tool that was important during the global financial crisis, the Fed made U.S. dollars available to foreign central banks to improve the liquidity of global dollar funding markets and to help those authorities support their domestic banks who needed to raise dollar funding. In exchange, the Fed received foreign currencies and charged interest on the swaps. For the five central banks that have permanent swap lines with the Fed—Canada, England, the Eurozone, Japan, and Switzerland—the Fed lowered its interest rate and extended the maturity of the swaps. It also provided temporary swap lines to the central banks of Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea, and Sweden. In June 2021, the Fed extended these temporary swaps until December 31, 2021.

Encouraging Banks to Lend

Direct lending to banks: The Fed lowered the rate that it charges banks for loans from its discount window by 2 percentage points, from 2.25% to 0.25%, lower than during the Great Recession. These loans are typically overnight—meaning that they are taken out at the end of one day and repaid the following morning—but the Fed extended the terms to 90 days. At the discount window, banks pledge a wide variety of collateral (securities, loans, etc.) to the Fed in exchange for cash, so the Fed takes little (or no) risk in making these loans. The cash allows banks to keep functioning, since depositors can continue to withdraw money and the banks can make new loans. However, banks are sometimes reluctant to borrow from the discount window because they fear that if word leaks out, markets and others will think they are in trouble. To counter this stigma, eight big banks agreed to borrow from the discount window in March 2020.

Temporarily relaxing regulatory requirements: The Fed encouraged banks—both the largest banks and community banks—to dip into their regulatory capital and liquidity buffers to increase lending during the pandemic. Reforms instituted after the financial crisis require banks to hold additional loss-absorbing capital to prevent future failures and bailouts. However, these reforms also include provisions that allow banks to use their capital buffers to support lending in downturns. The Fed supported this lending through a technical change to its TLAC (total loss-absorbing capacity) requirement—which includes capital and long-term debt—to gradually phase in restrictions associated with shortfalls in TLAC. (To preserve capital, big banks also suspended buybacks of their shares.) The Fed also eliminated banks’ reserve requirement—the percent of deposits that banks must hold as reserves to meet cash demand—though this was largely irrelevant because banks held far more than the required reserves. The Fed restricted dividends and share buybacks of bank holding companies throughout the pandemic, but lifted these restrictions effective June 30, 2021, for most firms based on stress test results. These stress tests showed that banks had ample capital to support lending even if the economy performed far weaker than anticipated.

Supporting Corporations and Businesses

Direct lending to major corporate employers: In a significant step beyond its crisis-era programs, which focused primarily on financial market functioning, the Fed established two new facilities to support the flow of credit to U.S. corporations on March 23, 2020. The Primary Market Corporate Credit Facility (PMCCF) allowed the Fed to lend directly to corporations by buying new bond issues and providing loans. Borrowers could defer interest and principal payments for at least the first six months so that they had cash to pay employees and suppliers (but they could not pay dividends or buy back stock). And, under the new Secondary Market Corporate Credit Facility (SMCCF), the Fed could purchase existing corporate bonds as well as exchange-traded funds investing in investment-grade corporate bonds. An orderly secondary market was seen as helping businesses access new credit in the primary market. These facilities allowed “companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic,” the Fed said. Initially supporting $100 billion in new financing, the Fed announced on April 9, 2020, that the facilities would be increased to backstop a combined $750 billion of corporate debt. And, as with previous facilities, the Fed invoked Section 13(3) of the Federal Reserve Act and received permission from the U.S. Treasury, which provided $75 billion from its Exchange Stabilization Fund to cover potential losses. Late in 2020, after the recovery from the pandemic was under way, and despite the Fed’s misgivings, Treasury Secretary Steven Mnuchin decided that the final bond and loan purchases for the corporate credit facilities would take place no later than December 31, 2020. The Fed objected to the cutoff, preferring to keep the facilities available until there was a firmer assurance that financial conditions would not deteriorate again. The Fed said on June 2, 2021 that it would gradually sell off its $13.7 billion portfolio of corporate bonds, which it completed in December 2021.

Commercial Paper Funding Facility (CPFF): Commercial paper is a $1.2 trillion market in which firms issue unsecured short-term debt to finance their day-to-day operations. Through the CPFF, another reinstated crisis-era program, the Fed bought commercial paper, essentially lending directly to corporations for up to three months at a rate 1 to 2 percentage points higher than overnight lending rates. “By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said. “An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.” As with other non-bank lending facilities, the Fed invoked Section 13(3) and received permission from the U.S. Treasury, which put $10 billion into the CPFF to cover any losses. The Commercial Paper Funding Facility lapsed on March 31, 2021.

Supporting loans to small- and mid-sized businesses: The Fed’s Main Street Lending Program, announced on April 9, 2020, aimed to support businesses too large for the Small Business Administration’s Paycheck Protection Program (PPP) and too small for the Fed’s two corporate credit facilities. The program was subsequently expanded and broadened to include more potential borrowers. Through three facilities—the New Loans FacilityExpanded Loans Facility, and Priority Loans Facility—the Fed was prepared to fund up to $600 billion in five-year loans. Businesses with up to 15,000 employees or up to $5 billion in annual revenue could participate. In June 2020, the Fed lowered the minimum loan size for New Loans and Priority Loans, increased the maximum for all facilities, and extended the repayment period. As with other facilities, the Fed invoked Section 13(3) and received permission from the U.S. Treasury, which through the CARES Act put $75 billion into the three Main Street Programs to cover losses. Borrowers are subject to restrictions on stock buybacks, dividends, and executive compensation. (See here for additional operational details.) Secretary Mnuchin, again over the Fed’s objections, decided that the Main Street facility would stop taking loan submissions on December 14, 2020, as it was set to make its final purchases by January 8, 2021. The Fed also established a Paycheck Protection Program Liquidity Facility that facilitated loans made under the PPP. Banks lending to small businesses could borrow from the facility using PPP loans as collateral. The PPP Liquidity Facility closed on July 30, 2021.

Supporting loans to non-profit institutions: In July 2020, the Fed expanded the Main Street Lending Program to non-profits, including hospitals, schools, and social service organizations that were in sound financial condition before the pandemic. Borrowers needed at least 10 employees and endowments of no more than $3 billion, among other eligibility conditions. The loans were for five years, but payment of principal was deferred for the first two years. As with loans to businesses, lenders retained 5 percent of the loans. This addition to the Main Street program lapsed with the rest of the facility on January 8, 2021.

Supporting Households and Consumers

Term Asset-Backed Securities Loan Facility (TALF): Through this facility, reestablished on March 23, 2020, the Fed supported households, consumers, and small businesses by lending to holders of asset-backed securities collateralized by new loans. These loans included student loans, auto loans, credit card loans, and loans guaranteed by the SBA. In a step beyond the crisis-era program, the Fed expanded eligible collateral to include existing commercial mortgage-backed securities and newly issued collateralized loan obligations of the highest quality. Like the programs supporting corporate lending, the Fed said the TALF would initially support up to $100 billion in new credit. To restart it, the Fed invoked Section 13(3) and received permission from the Treasury, which allocated $10 billion from the Exchange Stabilization Fund to finance the program. Without an extension, this facility stopped making purchases on December 31, 2020, at Secretary Mnuchin’s order.

Supporting State and Municipal Borrowing

Direct lending to state and municipal governments: During the 2007-09 financial crisis, the Fed resisted backstopping municipal and state borrowing, seeing that as the responsibility of the administration and Congress. But in this crisis, the Fed lent directly to state and local governments through the Municipal Liquidity Facility, which was created on April 9, 2020. The Fed expanded the list of eligible borrowers on April 27 and June 3, 2020. The municipal bond market was under enormous stress in March 2020, and state and municipal governments found it increasingly hard to borrow as they battled COVID-19. The Fed’s facility offered loans to U.S. states, including the District of Columbia, counties with at least 500,000 residents, and cities with at least 250,000 residents. Through the program, the Fed made $500 billion available to government entities that had investment-grade credit ratings as of April 8, 2020, in exchange for notes tied to future tax revenues with maturities of less than three years. In June 2020, Illinois became the first government entity to tap the facility. Under changes announced that month, the Fed allowed governors in states with cities and counties that did not meet the population threshold to designate up to two localities to participate. Governors were also able to designate two revenue bond issuers—airports, toll facilities, utilities, public transit—to be eligible. The New York Metropolitan Transportation Authority (MTA) took advantage of this provision in August, borrowing $451 million from the facility. The Fed invoked Section 13(3) with the approval of the U.S. Treasury, which used the CARES Act to provide $35 billion to cover any potential losses. (See here for additional details.) The Municipal Liquidity Facility stopped purchases on December 31, 2020 when it lost Treasury support, per Secretary Mnuchin’s decision. The New York MTA secured a second loan from the facility on December 10, 2020, borrowing $2.9 billion before lending halted.

Supporting municipal bond liquidity: The Fed also used two of its credit facilities to backstop muni markets. It expanded the eligible collateral for the MMLF to include municipal variable-rate demand notes and highly rated municipal debt with maturities of up to 12 months. The Fed also expanded the eligible collateral of the CPFF to include high-quality commercial paper backed by tax-exempt state and municipal securities. These steps allowed banks to funnel cash into the municipal debt market, where stress had been building due to a lack of liquidity.


Steps taken by federal, state, and local officials to mitigate the spread of the virus limited economic activity, leading to a sudden and deep recession with millions of jobs lost. The Fed’s actions ensured that credit continued to flow to households and businesses, preventing financial market disruptions from intensifying the economic damage.

In many other countries, most credit flows through the banking system. In the U.S., a substantial amount of credit flows through capital markets, so the Fed worked to keep them functioning as smoothly as possible. As one of our colleagues, Don Kohn, former Federal Reserve Vice Chair, said in March 2020:

“The Treasury market in particular is the foundation for trading in many other securities markets in the U.S. and around the world; if it’s disrupted, the functioning of every market will be impaired. The Fed’s purchase of securities is explicitly aimed at improving the functioning of the Treasury and MBS markets, where market liquidity had been well below par in recent days.”

But targeting the Treasury market proved insufficient, given the severity of the COVID recession and the disruption of flows of credit across other financial markets. So the Fed intervened directly in the markets for corporate and municipal debt to ensure that key economic actors could raise funds to pay workers and avoid bankruptcies. These measures aimed to help businesses survive the crisis and resume hiring and production when the pandemic ebbed.

Banks also needed support to keep credit flowing. When financial markets are clogged, firms tend to draw on bank lines of credit, which can lead banks to pull back on lending or selling Treasury and other securities. The Fed supplied unlimited liquidity to financial institutions so they could meet credit drawdowns and make new loans to businesses and households feeling financial strains.

Ten year Treasury yield drops, driving popular bond-market recession gauge to most-negative level in more than 40 years


Vivien Lou Chen 11/16/2022

The benchmark 10-year Treasury yield dropped to another one-month low on Wednesday, driving a popular bond-market gauge that is an indicator of a potential recession to its most negative level in more than 40 years.

The spread between 2- and 10-year rates shrank to 67 basis points, a level not seen since Feb. 18, 1982, when it went to minus 70.5 basis points.

What’s happening

  • The yield on the 2-year Treasury rose less than 1 basis point to 4.363% from 4.359% as of Tuesday.
  • The yield on the 10-year Treasury dropped 10.5 basis points to 3.693% from 3.798% late Tuesday. Wednesday’s level is the lowest for the 10-year yield since Oct. 4, based on 3 p.m. figures from Dow Jones Market Data.
  • The yield on the 30-year Treasury fell 12 basis points to 3.860% from 3.980% on Tuesday afternoon. Wednesday’s level is the lowest for the 30-year rate since Oct. 7.

What’s driving markets

Bond investors looked past Wednesday’s retail-sales report and focused instead on a worsening economic outlook as the Federal Reserve keeps hiking interest rates.

Markets are pricing in an 85% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% on Dec. 14, according to the CME FedWatch tool. Traders also slightly boosted their expectations that the central bank will take the fed-funds rate target above 5% next year.

A team at Goldman Sachs now sees the likelihood that the Fed will raise borrowing costs to between 5% and 5.25% in 2023, above its prior forecast of 4.75% and 5%. Meanwhile, San Francisco Fed President Mary Daly told CNBC that the central bank’s benchmark interest-rate target may have to rise above 5% to put downward pressure on inflation.

However, Fed Governor Christopher Waller said Wednesday that recent economic data should allow the Federal Reserve to at least consider stepping down the pace of its interest rate hikes at its next meeting in December.

U.S retail sales jumped 1.3% for October, signaling that consumers are still spending plenty of money, despite persistent inflation and the Fed’s efforts to combat it. That’s better than the 1.2% rise that had been forecast by economists polled by The Wall Street Journal. Other data released on Wednesday showed that industrial production was down 0.1% in October after a revised 0.1% gain in the prior month.

Lawmakers Pass Debt Limit

On October 12, lawmakers in the House pushed through a bill that ensures that the U.S. Treasury can continue to meet its financial obligations for the next couple of months. The bill raising the nation’s debt ceiling cleared the Senate last week and now only needs the President’s signature. By passing the measure, the Treasury, which would have otherwise exhausted methods for keeping the nation’s financial obligations current, avoids potential disaster.

However, the bill only provides a temporary solution. Once signed into law, the provision will increase the debt limit by $480 billion; extending the Treasury’s ability to keep the country’s finances in order. Congress will have until December to pass another bill either raising the ceiling again, or suspending the debt limit all together. The consequences of a default on US debt obligations could be dire, sending global financial markets into uncertainty and inviting an economic downturn.

Senate Passes Bipartisan Infrastructure Bill

On August 10, through a 69-30 vote, the Senate passed the infrastructure package that has been under negotiation since the beginning of March this year. The bill will roll out over $500 billion in “new” federal spending, providing fresh monetary support for roads, bridges, transit systems and more. After multiple bipartisan coalitions from the Senate resulted in frustration and hand-wringing, a group led by Senator Sinema (D-AZ) and Senator Portman (R-OH) managed a breakthrough.

The successful vote is being hailed as a rare bipartisan achievement, but the overall future of infrastructure spending remains uncertain as the deal proceeds to a skeptical House. Democrat leaders have maintained that the Senate infrastructure bill has little hope of success in the House without the passage of a robust budget resolution bill that includes reconciliation instructions, allowing Congress to get legislation on the President’s desk with fewer votes than normally required.

To that end, early Wednesday morning on strict party lines, the Senate adopted the measure necessary to eventually bring a reconciliation bill to the floor. The $3.5 trillion framework contains many of the priorities left out of the bipartisan infrastructure bill including funding for “human infrastructure” and the general expansion of the social safety net. Congress will remain in recess until after labor day, leaving lawmakers little time to determine the path forward before the current authorization for transportation spending expires at the end of September.

House Approves Biden’s Stimulus Bill

New York Times: Emily Cochrane March 10, 2021

Congress gave final approval on Wednesday to President Biden’s sweeping, nearly $1.9 trillion stimulus package, as Democrats acted over unified Republican opposition to push through an emergency pandemic aid plan that included a vast expansion of the country’s social safety net.

By a vote of 220 to 211, the House passed the measure and cleared it for Mr. Biden’s signature, cementing one of the largest injections of federal aid since the Great Depression. Mr. Biden is expected to sign the bill Friday. All but one Democrat, Representative Jared Golden of Maine, voted in favor.

It would provide another round of direct payments for many Americans, an extension of federal jobless benefits and billions of dollars to distribute coronavirus vaccines and provide relief for schools, states, tribal governments and small businesses struggling during the pandemic.

The vote was the culmination of a swift push by Mr. Biden and Democrats, newly in control of both chambers of Congress and the White House, to address the toll of the pandemic and begin putting in place their broader economic agenda. It includes a set of measures that is estimated to slash poverty by a third this year and potentially cut child poverty in half, including expansions of tax credits, food aid and rental and mortgage assistance.

“With the stroke of a pen, President Biden is going to lift millions and millions of children out of poverty in this country,” Representative Rosa DeLauro, Democrat of Connecticut, said. “It is time to make a bold investment in the health and security of the American people — a watershed moment.”

While Republicans argued the plan, whose final cost was estimated at $1.856 trillion, was bloated and unaffordable, polls indicate that it has widespread support, with 70 percent of Americans favoring the package, according to a Pew Research Center poll released Wednesday.

“House Democrats have abandoned any pretense of unity,” said Representative Kevin McCarthy, Republican of California and the minority leader. “This isn’t a rescue bill, it isn’t a relief bill. It’s a laundry list of left-wing priorities that predate the pandemic.”

Mr. Biden and congressional Democrats planned an elaborate effort to promote it throughout the country, racing to claim credit for the coronavirus aid and a set of provisions they hope to make permanent in the years to come, and to punish Republicans politically for failing to support any of it.

“This bill represents a historic, historic victory for the American people,” Mr. Biden said at the White House following the bill’s approval, thanking Speaker Nancy Pelosi and the House.

Final passage came less than two months after Mr. Biden took office and about a year after cities and states across the country began to shutter to stem the spread of the coronavirus.

The measure will provide $350 billion for state, local and tribal governments and $10 billion for critical state infrastructure projects; $14 billion for the distribution of a vaccine, and $130 billion to primary and secondary schools. The bill also includes $30 billion for transit agencies, $45 billion in rental, utility and mortgage assistance, and billions more for small businesses and live performance venues.

It would provide another round direct payments to American taxpayers, sending checks of up to $1,400 to individuals making $80,000 or less, single parents earning $120,000 or less and couples with household income of no more than $160,000.

Federal unemployment payments of $300 per week would be extended through Sept. 6, and up to $10,200 of jobless aid from last year would be tax-free for households with incomes below $150,000. It would also provide a benefit of $300 per child for those age 5 and younger — and $250 per child ages 6 to 17, increasing the value of the so-called child tax credit.

The legislation also contains a substantial, though temporary, expansion of health care subsidies that could slash monthly insurance payments for those purchasing coverage under the Affordable Care Act. And for six months, it would fully cover COBRA health care costs for people who have lost a job or had their hours cut and who buy coverage from their former employer.

Advance Refunding Bill Introduced in the Senate

GFOA Member News: February 25, 2021

On February 25, Senator Roger Wicker (R-MS) introduced legislation reinstating advance refunding to the tax code.  Senator Wicker has been a steadfast ally in support of bringing the provision back, citing the value the statute brings to local leaders as a financial management tool.

In July 2020, after introducing the LOCAL Act, Senator Wicker remarked, “Restoring advance refunding is a proven way to give our local leaders the ability to manage existing debts, reduce costs, and free up additional money for much-needed local infrastructure projects.”

5 ways the Fed’s interest rate decisions impact you

Sarah Foster September 18,2019

You don’t want to hit the snooze button when the Federal Reserve decides to raise or lower rates.

The central bank of the U.S. – also known as the Fed – is charged by Congress with maintaining economic and financial stability. Mainly, it tries to keep the economy afloat by raising or lowering the cost of borrowing money, and its actions have a great deal of influence on your wallet.

Why does the Fed raise or lower interest rates?

The logic goes like this: When the economy slows – or merely even looks like it could – the Fed may choose to lower interest rates. This action incentivizes businesses to invest and hire more, and it encourages consumers to spend more freely, helping to propel growth. On the contrary, when the economy looks like it may be growing too fast, the Fed may decide to hike rates, causing employers and consumers to tap the brakes on their financial decisions.

“When the Fed raises or reduces the cost of money, it affects interest rates across the board,” says Greg McBride, CFA, Bankrate chief financial analyst. “One way or another, it’s going to impact savers and borrowers.”

Officials on the Fed’s rate-setting Federal Open Market Committee (FOMC) typically meet eight times a year. They look at a broad range of economic indicators, but most notably, they pay attention to employment and inflation data.

The Fed cut interest rates in July for the first such move in more than a decade, when the economy was facing its worst economic crisis since the Great Depression. Officials cut borrowing costs again at the conclusion of their September meeting. They’re worried about a global growth slowdown, weakness in the U.S. manufacturing sector, as well as the ongoing tit-for-tat trade war with China.

Here are five ways that you can expect the Fed to impact your wallet.

1. The Fed affects credit card rates

Most credit cards have variable interest rates, and they’re tied to the prime rate, or the rate that banks charge to their preferred customers with good credit. But the prime rate is based off of the Fed’s key benchmark policy tool: the federal funds rate.

In other words, when the Fed lowers or raises its benchmark interest rate, the prime rate typically falls or rises with it.

“What the Federal Reserve does normally affects short-term interest rates, so that affects the rates that people pay on credit cards,” says Gus Faucher, chief economist at PNC Financial Services Group.

That prime rate, however, hasn’t moved in 2019; the Fed has been on hold.

But after the December meeting, when U.S. central bankers voted unanimously to adjust their benchmark interest rate for the fourth time in 2018, the prime rate edged up with it. Leading up to the July rate cut, the prime rate was 3 percentage points higher than the midpoint of the federal funds rate, which was 2.25 percent and 2.5 percent. It typically stays at that level.

2. The Fed affects savings and CD rates

If you’re a saver, you most likely won’t feel like a beneficiary of a Fed rate cut.

That’s because banks typically choose to lower the annual percentage yields (APYs) that they offer on their consumer products — such as savings accounts — when the Fed cuts interest rates. For example, banks in June 2019 lowered their yields in anticipation of a rate cut, including Ally and Marcus by Goldman Sachs.

But when and by how much banks choose to lower yields after a rate cut depends on those broader conditions, as well as competition in the space, McBride says. It’s also worth remembering that most high-yields savings accounts on the market have annual returns that outpace inflation.

“If the Fed cuts rates, yields will fall, but you’re still going to be far ahead from where you were a few years ago,” McBride says. “Even if they unwind one of the nine rate hikes that they’ve made since 2015, the top-yielding accounts are still going to be paying a rate above inflation.”

Certificate of deposit (CD) yields generally fall when the Fed cuts rates as well, but broader macroeconomic conditions also have an influence on them, such as the 10-year Treasury yield.

But individuals should focus on the inflation-adjusted rate of return on CDs, says Casey Mervine, vice president and a senior financial consultant at Charles Schwab. In the late 1970s, for instance, yields on CDs were in the double digits; inflation, however, was as well. That means consumers’ actual earnings were much lower, due to the erosion of their purchasing power.

If you’re worried about a Fed rate cut impacting your returns, consider locking down a CD now.

“Sometimes people start lowering their rates in anticipation of a cut,” says Katie Miller, senior vice president of savings products at Navy Federal Credit Union. “That’s why I say, if you see some good CD rates, take them.”

3. The Fed’s influence over mortgage rates is complicated

Mortgage rates aren’t likely going to respond quickly to a Fed rate adjustment. Interest rates on home loans are more closely tied to the 10-year Treasury yield, which serves as a benchmark to the 30-year fixed mortgage rate.

That’s evident when you look into the past. Each time the Fed has adjusted rates, mortgage rates haven’t always responded in parallel. For example, the Fed hiked rates four times in 2018, but mortgage rates continued to edge downward in late December.

But even though the Fed has little direct control over mortgage rates, both end up being influenced by similar market forces, McBride says.

“The 30-year fixed mortgage rate has fallen more than a full percentage point from last year,” McBride says. “While not directly related to a Fed cut, the two are sort of a reflection of the same concern: the expectation that the economy is going to slow.”

Officials are worried about a slowdown in global growth, as well as ongoing trade tensions and low inflation. Markets in recent weeks have shared those concerns. Yields on the 30-year Treasury note fell to a fresh low and the 2-year, 10-year curve inverted Aug. 14 for the first time since the Great Recession.

It’s highly likely that you’ll start to see those long-term rates slip lower in tandem with short-term borrowing costs, Miller says.

“It’s long-term expectations that tend to dictate where mortgage rates go more than short-term, but even long-term expectations are getting a little bit lower here,” according to Miller. “You’ll probably see mortgage rates come down as well. The more that comes down, the better off you are, especially if you’ve gotten you a mortgage in the last couple of years.”

That means refinancing could be a smart option for your pocketbook. A reduction in even just a quarter of a percentage point could potentially shave off a couple hundred dollars from your monthly payments.

“Mortgage debt tends not to be high cost; it’s just high interest because of the value of the actual mortgage itself,” Miller says, “which is why small changes in rates can make a big difference.”

4. The Fed impacts HELOCs

However, if you have a mortgage with a variable rate or a home equity line of credit – also known as a HELOC – you’ll feel more influence from the Fed. Interest rates on HELOCs are often pegged to the prime rate, meaning those rates will fall if the Fed does indeed lower borrowing costs.

Modest Fed moves, however, likely aren’t going to steer those rates in a drastic direction either, McBride says. Leading up to the Fed’s rate cut, HELOC rates were still about 2 percentage points higher from where they were a year ago, he says.

5. The Fed drives auto loan rates

If you’re thinking about buying a car, you might see slight relief on your auto loan rate. Even though the fed funds rate is a short-term rate, auto loans are still often tied to the prime rate.

It might, however, be a modest impact. The average rate on a five-year new car loan is 4.62 percent, down from 4.72 before the Fed cut rates in July, according to Bankrate data.

Bottom line

When the Fed cuts rates, it’s easy to think of it as discouraging savings, McBride says. “It’s reducing the price of money. It incentivizes borrowing and disincentivizes savings. Essentially, it gets money out of bank accounts and into the economy.” On the other hand, a Fed rate hike discourages borrowing, as the cost of money is now more expensive.

But that doesn’t mean it’s a bad time to save. Building up an emergency savings cushion, and saving in general, is a prudent financial step.

“Good savings habits are important independent of the interest-rate environment,” Miller says. “Your transmission in your car, if it breaks, it doesn’t realize if rates are low.”

Stay ahead of any Fed rate moves by keeping an eye on your bank’s APY. Regularly checking your bank statement can also help you determine whether you’re earning a rate that’s competitive with other options on the market.

If the Fed looks like it’s going to hike rates, paying off high-cost debt ahead of time could create some breathing room in your budget before a Fed rate hike. Use Bankrate’s tools to find the best auto loan or mortgage for you.

New round of China tariffs could set stage for more Fed rate cuts

8/1/2019 Reuters:  Ann Saphir and Richard Leong

President Donald Trump’s decision to impose new tariffs on Chinese imports has once more thrown the Federal Reserve a curve ball that could prompt the central bank again cut interest rates again to protect the U.S. economy from trade-policy risks.

In a series of tweets Thursday, Trump said he will slap 10% tariffs on $300 billion of Chinese imports starting Sept. 1.

Trump announced a first tranche of duties, of 25% on $200 billion of Chinese goods, in May. The tariffs are aimed at putting pressure on the world’s second biggest economy to strike a trade deal.

The drag those tariffs and other Trump trade policies have had on business sentiment and investment was a key driver of the Fed’s decision this week to cut interest rates for the first time since the financial crisis.

Fed Chairman Jerome Powell said he viewed the cut as an insurance policy against the effects of trade uncertainty, weak global growth and low inflation, calling it a “mid-cycle adjustment” and not a start to a lengthy rate-cutting cycle.

If trade troubles deepen into a full blown trade war, DRW Holdings analyst Lou Brien said, “Any further Fed rate cuts will no longer be considered mid-course adjustments so much as they will be thought of as necessities to prevent a recession.”

Traders are betting the new tariffs make a longer rate-cutting cycle more likely.

U.S. interest rate futures rallied as traders piled on bets that the central bank will cut rates two more times by year’s end and reduce them further next year to offset risks from the escalating trade war.

Fed funds futures implied traders now see a 70% chance the Fed would lower rates again in September, up from 51% late on Wednesday, CME Group’s FedWatch tool showed.

The fed funds complex suggested traders are rebuilding bets on a possible third rate cut by year-end with an implied 60% chance for such a move, up from 39% late Wednesday.

“The key word is ‘uncertainty,” said Richard Bernstein, chief executive at Richard Bernstein Advisors in New York. “Uncertainty acts like the Fed tightening. It raises risk premiums and stymies activity. Full stop.”

Preparing for the Discontinuation of LIBOR and Transition to SOFR

May 2, 2019 GFOA Newsletter

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop compelling banks to submit London Interbank Offered Rates (LIBOR) by the end of 2021. The New York Fed has started publishing the Secured Overnight Financing Rate (SOFR), a new reference rate based on overnight loans collateralized by U.S. Treasuries. SOFR is the anticipated replacement for the LIBOR index. GFOA recommends governments assess your overall LIBOR exposure and begin conversations with your partners on a process to address the cessation of LIBOR.

In prepared comments to the Financial Stability Board on April 10, GFOA Past President Patrick J. McCoy emphasized that clarity and process for both the issuer and the investor as very important in the expected transition. Additionally on April 15, at a convening of the Fixed Income Market Structure Advisory Committee, Mr. McCoy provided comments on behalf of GFOA, adding limiting ‘unknowns’ is especially important to the public markets where we promote transparency to ensure that investors have appropriate material information about municipal securities.

Liquidity Coverage Ratio Rule/HQLA Resource Center

GFOA Newsletter:  July 27, 2017

Urge Your Congressional Representatives to Classify Municipal Securities as High Quality Liquid Assets!

On July 25, 2017, the House Financial Services Committee approved HR 1624, bipartisan legislation that would require federal regulators to classify all investment grade municipal securities as high quality liquid assets (HQLA). This important legislation is necessary to amend the liquidity coverage ratio rule approved by federal regulators in 2014, which classifies foreign sovereign debt securities as HQLA while excluding investment grade municipal securities in any of the acceptable investment categories for banks to meet new liquidity standards.

Not classifying municipal securities as HQLA will increase borrowing costs for state and local governments to finance public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress, or even forgo the purchase of municipal securities. The resulting cost impacts for state and local governments could be significant, with bank holdings of municipal securities and loans having increased by 86% since 2009.

The next stop for HR 1624 is the House floor, but the date for its consideration has not been determined yet. GFOA is urging members to send letters to their congressional delegations urging support for this bill. A draft letter has been developed for your use which is available here. Please reach out to your House members today and urge them to support HR 2209.


In September of 2014 the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) approved a rule establishing minimum liquidity requirements for large banking organizations. The liquidity coverage ratio rule was designed to ensure that large banks maintain liquid assets that can easily be converted to cash during times of national economic crisis. The rule identifies High Quality Liquid Assets (HQLA) to meet this requirement, but fails to include municipal securities in any of the acceptable investment categories (despite including foreign sovereign debt!).

Following approval of the new rule, the GFOA and our state and local association partners have urged the Federal Reserve, FDIC and OCC to amend the rule to classify investment-grade, liquid and readily marketable municipal securities as HQLA.  On May 21, 2015 the Federal Reserve Board issued a proposed rule that would designate certain investment grade municipal securities as HQLA. While the GFOA is extremely grateful for the Federal Reserve’s recognition of the liquidity features of municipal securities, we have some concerns with the proposal, which we raised in our comment letter. Such concerns include the proposal’s failure to include revenue bonds as HQLA, and its limit on the total amount of general obligation (GO) securities that a financial institution can hold to no more than 5 percent of the institution’s total amount of HQLA.

Meanwhile the FDIC and OCC refuse to modify the rule for municipal securities.  In the absence cooperation from the agencies, the GFOA is working with bipartisan champions in Congress to change the rule through legislation (HR 2209) and preserve low-cost infrastructure financing for state and local governments and public sector entities.

Managing an investment portfolio in today’s volatile financial markets requires sophisticated financial tools.