WASHINGTON, D.C. – The Federal Reserve said it would seek to hold down spiking interest rates in the state and municipal bond markets by supporting banks' purchase of the bonds.
The Fed said Friday that it would loan money to banks that banks would then use to purchase highly-rated muni bonds from money market mutual funds or from muni bond funds.
The goal is to stabilize the $3.8 trillion muni bond market and ensure states and cities and other public entities, including hospitals, can borrow at low cost.
Without the ability to borrow, local and state governments could be forced to lay off workers. The Federal Reserve Bank of Boston is conducting the transactions and is doing so by expanding the Money Market Mutual Fund Liquidity
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