Fed lending program for state, local governments up and running

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The Federal Reserve's lending facility for state and local governments is officially up and running, New York Federal Reserve President John Williams said on Thursday.

The municipal liquidity facility allows states, as well as cities and counties, that face revenue shortfalls as a result of the coronavirus pandemic and the ensuing economic lockdown to borrow money from the U.S. central bank.

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The Fed created the $500 billion facility to directly purchase state and local debt; counties with at least 500,000 residents and cities with at least 250,000 are eligible. The Treasury Department has provided $35 billion to account for any losses.

"This program can make sure that state and local governments do not have to lay off workers and cut services," Williams said.

Previously, only one of the lending facilities established by the Fed had been deployed, according to a report released last week by a bipartisan oversight committee. The Treasury has disbursed $37.5 billion of the funds to the Fed's Secondary Market Corporate Credit Facility, which is supposed to purchase corporate debt.

Still, it's possible that states and cities will snub the Fed's lending facility as a result of high borrowing costs, according to Reuters.

Cooper Howard, director of fixed-income strategy at the Schwab Center for Financial Research, told Reuters that sample purchase rates released by the New York Fed on Wednesday were heftier than what highly rated governments can typically acquire in the U.S. municipal market.

The Fed “wants to be the lender of last resort,” he said.

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FOX Business' Edward Lawrence contributed to this report