Federal Reserve backstops muni bond market as coronavirus hammers cash-strapped states and cities

FILE - This Jan. 31, 2020, file photo shows a Wall Street sign in front of the New York Stock Exchange. Global stock markets and U.S. futures are up on hopes that government aid and central banks can shield the global economy against the rising impact of the coronavirus pandemic. Indexes in London, Frankfurt, Shanghai and Hong Kong advanced Friday, March 20, 2020 and U.S. futures were also higher. less FILE - This Jan. 31, 2020, file photo shows a Wall Street sign in front of the New York Stock Exchange. Global stock markets and U.S. futures are up on hopes that government aid and central banks can shield ... more Photo: Mark Lennihan, AP Photo: Mark Lennihan, AP Image 1 of / 3 Caption Close Federal Reserve backstops muni bond market as coronavirus hammers cash-strapped states and cities 1 / 3 Back to Gallery

The Federal Reserve capped off an unprecedented week of action Friday by extending a lifeline to cash-strapped state and local governments that are about to borrow large sums as they deal with skyrocketing costs from coronavirus safety measures.

There has been a large selloff in municipal debt in recent days, driving up the borrowing costs for many states and localities that need to pay their bills.

This is the ninth major action by the Fed this week to try to stabilize financial markets, prevent the downturn from worsening and keep credit flowing to companies and households.

The Fed will make loans available to financial institutions that can be secured by "high quality" state and local bonds. This will make owning these tax-exempt municipal bonds more attractive and should help ensure there is plenty of demand for these bonds as many states and cities begin to issue more debt in the coming weeks and months.

"The Federal Reserve Board on Friday expanded its program of support for the flow of credit to the economy by taking steps to enhance the liquidity and functioning of crucial state and municipal money markets," the Fed said in a statement.

Earlier this week, the central bank slashed interest rates to zero, re-started massive purchases of U.S. Treasury debt and mortgage-backed securities, began making 0.25% loans to banks and announced backstops for numerous parts of the credit market.

Goldman Sachs predicted Thursday that over 2 million Americans likely lost their jobs this week and many companies could go bankrupt in the next three months if they do not get aid. The Fed's actions are an effort to make as many cheap loans and lines of credit available to households and businesses as possible to make it through the coronavirus recession.