The Federal Reserve is expanding its asset purchases to include municipal bonds

The Federal Reserve said Friday it would extend its asset purchase program into short-term municipal bonds.

Thus far, the central bank has limited its efforts to Treasurys and mortgage-backed securities in an effort to keep liquidty flowing through the system and to stabilize credit markets. 

However, continued disruption in the markets for state and local government debt promoted the Fed to take further action in its efforts to combat coronavirus effects.

In a statement, the Fed said the move is “to enhance the liquidity and functioning of crucial state and municipal money markets.”

The program will work through the Money Market Mutual Fund Liquidity Facility announced earlier this week and offers an expansion of what had been a financial crisis-era program authorizing purchases of other assets. Expanding into munis is something that did not happen during the crisis.

The Boston Fed will lend to eligible banks and other financial institutions that will be able to use single-state and other tax-exempt munis as collateral. Maturities can’t exceed 12 months.

The Fed had previously announced a $700 billion asset purchase regime involving $500 billion in Treasurys and the remainder in MBS. 

This is breaking news. Check back here for updates.

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