I think our authority is extremely limited and it wouldn't be appropriate for us to give loans to Puerto Rico. We have very limited authority to buying municipal debt and the authority we have, if we were buy eligible debt, I don't think it would be helpful to Puerto Rico, and beyond that we have no ability to make emergency loans. We could not use 13.3 or emergency powers of that type to extend the loan to Puerto Rico and I don't think it would be this is inherently a matter for Congress and is not something that's appropriate for the Federal Reserve.

So we have very limited ability to buy state, local, municipal debt, and moreover, the Dodd-Frank legislation restricts our ability, additionally, not to lend to any insolvent borrower and not to lend to an individual borrower, but only in terms of a broad program. So we have no expectation or intention to get involved in state and local finance. I think to the extent that there's anyone to look at that, it would have to be Congress to look at that.

From the Q&A session

The Federal Reserve Act was designed when most credit flowed through banks, but over time securities markets have assumed a much more prominent role in the distribution of credit. Our ability to preserve financial stability may be enhanced by making sure the Federal Reserve has authority to lend against good collateral to other classes of sound, regulated financial institutions that are central to our financial markets--not on a routine basis, but in some circumstances when the Board of Governors finds that the absence of such lending would threaten market functioning and economic stability. The collateral would have to be of good quality and the institutions sound to minimize any credit risk the Federal Reserve might take. And the institutions would need to be tightly regulated and closely supervised to limit the moral hazard of permitting access to the discount window, even when such access is not routinely granted. I want to be quite clear that I am not referring to lending under section 13(3) to individual troubled institutions, like American International Group. That sort of lending is more appropriately done by the fiscal authorities and conducted only in association with the exercise of new authority to resolve systemically important financial institutions.

[A]t some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities. Indeed, where possible, we have tried to set lending rates and other terms at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs--those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will, by law, have to be phased out once credit market conditions substantially normalize. However, the principal factor determining the timing and pace of that process will be the Federal Reserve's assessment of the condition of credit markets and the prospects for the economy.

I think that's something the Congress ought to consider. Congress has close relationships to the state and local municipalities. And certainly, that would be something that needs to be done by the Congress.

It's actually more difficult for the Federal Reserve for a number of reasons, technical and otherwise. But the one that I'd point out is that the 13(3) authority, as broad as it is, excludes loans to municipalities. So we could not do that, at least not directly.

In response to a question about creating a standby facility for variable rate municipal bonds

We realized early on that stabilizing the financial system would require lending not only to institutions in the traditional banking sector but also to those in the shadow banking sector.  Doing so required invoking section 13(3) of the Federal Reserve Act, which authorizes lending to nonbanks only in “unusual and exigent circumstances.”  For example, it was used to facilitate the acquisition of Bear Stearns and to stabilize AIG and Citigroup—three systemically important financial firms.  This authority was also used to establish a discount window facility for primary dealers—the Primary Dealer Credit Facility (PDCF)—and a new facility to enhance the ability of primary dealers to finance their securities inventories through the market for repurchase agreements—the Term Securities Lending Facility (TSLF).  

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs.  To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities.  Indeed, where possible we have tried to set lending rates and margins at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize.  In addition, some programs--those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will by law have to be eliminated once credit market conditions substantially normalize...

As lending programs are scaled back, the size of the Federal Reserve's balance sheet will decline..  A significant shrinking of the balance sheet can be accomplished relatively quickly. .. as the various programs and facilities are scaled back or shut down.  As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy--namely, by setting a target for the federal funds rate.

Although a large portion of Federal Reserve assets are short-term in nature, we do hold or expect to hold significant quantities of longer-term assets, such as the mortgage-backed securities that we will buy over the next two quarters.  Although longer-term securities can also be sold, of course, we would not anticipate disposing of more than a small portion of these assets in the near term, which will slow the rate at which our balance sheet can shrink.  We are monitoring the maturity composition of our balance sheet closely and do not expect a significant problem in reducing our balance sheet to the extent necessary at the appropriate time.

We have a very high bar for unusual and exigent, so this is twice in 75 years that we've used this -- that we've applied this power.

During the Q&A session.