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federal reserve
The Fed Can Give States and Cities Money Power to Fund Essential Social Programs
Just as it offers credit to banks at policy-dictated interest rates, the Fed can create credit facilities for states and cities at a policy rate that will further its mandate of price stability and maximum employment.
Jun 22, 2025
In the face of President Donald Trump’s efforts to reduce the size of the federal government and the slashing of the federal budget, states, cities, and universities can target the Federal Reserve to demand access to 0% lines of credit.
Here are the central talking points of this article:
- States and cities are not helpless. The money for what we need is there if we demand it.
- The money is there for banks and corporations; it’s time we make it available for us.
- Jerome Powell doesn’t need to go along with Trump and create a recession. He can give us the same money power he gives banks to prevent an economic disaster.
- In 2020, the Fed opened up the money power to states and cities. We need them to do it again, before it’s too late.
States, cities, and universities are facing a potentially catastrophic level of austerity from Republicans in Congress and the White House. The massive budget cuts to healthcare, education, transit, and any discretionary program related to “equity” (alongside tax cuts and deregulation) would intensely constrain the possibilities for expanding social services and benefits for workers at the local level.
The federal government is the legal authority of the U.S. monetary system and faces different constraints on its power to mobilize resources than states, cities, and universities do. While the former brings money into existence through spending and “deletes” money through taxation, the latter do not have access to this “money power” and must tax and borrow in order to spend. The dollars created through federal spending can be called “government money.”
However, the federal government is not the only entity with the money power. Banks create money through loans. When a borrower gets a mortgage, for example, a deposit is created that introduces new dollars into the system, and repayment of the loan “deletes” that money out of circulation. Banks are delegated access to the money power from their legal charter, which grants them rights and responsibilities with the Federal Reserve, federal deposit insurance, and other regulations. The dollars created through bank lending can be called “bank money,” which makes up more than 95% of money in circulation.
States, cities, and universities fiscal policy exists downstream from government money and bank money. Their lack of access to money power is a fundamental political problem by design. The federal government retaining the sole power to create government money keeps states and cities subordinate to Washington as a power center; the Federal Reserve granting access only to privately owned banks means our society prioritizes private wealth accumulation first above social needs. As Congress and the president push to stop the flow of new government money, states and cities can use this as an opportunity to refocus on bank money and the discrepancy between giving private banks the money power instead of the public.
The Federal Reserve can resolve this unjust dynamic by opening up the money power to states, cities, and universities directly. Just as it offers credit to banks at policy-dictated interest rates, the Fed can create credit facilities for states and cities at a policy rate that will further its mandate of price stability and maximum employment. Toward that end, the best default interest rate would be permanently at 0%.
The Fed did open credit access to states and cities during the Covid-19 pandemic via the Municipal Liquidity Facility (MLF). However, they set a policy rate at a premium to the prevailing interest rate on offer by the municipal securities market. This backstop facility stabilized the municipal debt market in the immediate wake of lockdowns and their economic impacts but was only used by the state of Illinois and New York City’s Metropolitan Transit Authority (MTA). While the MLF was created using the Fed’s “emergency powers” under section 13(3) of the Federal Reserve Act, analysts such as Nathan Tankus affirm that ongoing credit lines to states and cities are plainly legal under the Fed’s normal statutory authority.
The upshot of an unlimited 0% line of credit from the Fed would be a profound expansion of the potential fiscal space for states, cities, and universities. In economic downturns, they would be able to “monetize” similarly to the federal government: expand public spending to lower unemployment and increase economic activity, while increasing taxes and fees to pay back the 0% loan over time. They would also save a significant amount on the interest paid to bondholders and debt servicing costs. This is why in 2021, the Philadelphia City Council unanimously passed a resolution calling on the Fed to do just this proposal, which states and cities could build upon today.
It is important to note that this would not be the same unrestricted capacity for mobilizing resources as the federal government. While an unrestricted 0% line of credit would be the ideal, the practical negotiation around implementation would be around constraints to address “moral hazard” concerns, which may include restrictions on the budget priorities or decisions made by states and cities. But just as with the Payroll Protection Program, which was a forgivable loan program provided to businesses during the Covid-19 pandemic, or as proposed by proponents of student debt cancellation, loans to states and cities could be de facto converted into grants through cancellation as needed. Over the long term, a public bank would be the ideal coordinating mechanism for a state, city, or university interfacing with the Federal Reserve, rather than their comptroller or treasurer’s office.
The economic crisis created by the Trump administration’s policies will likely initiate a next wave of “disaster capitalism,” gutting public services and outsourcing jobs to the private sector (and “AI”). The Fed has a duty to act to prevent the price instability and unemployment rise we can anticipate from this willful negligence and malice. It will only do so if the public recognizes the money power where it exists and makes clear that we will not accept inaction in the face of economic catastrophe.
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Experts Warn Fed Remarks Show Trump Policies Brewing 'Perfect Storm for a Recession'
"Donald Trump's tariffs mean you could suffer higher prices and lose your job AT THE SAME TIME," said Sen. Elizabeth Warren.
May 07, 2025
Alex Jacquez from the progressive think tank Groundwork Collaborative issued a stark warning to the U.S. public on Wednesday in response to a statement from the Federal Reserve committee that sets interest rates.
The new statement from the Federal Open Market Committee (FOMC) "provides further evidence that a perfect storm for a recession is brewing" under U.S. President Donald Trump, said Jacquez, Groundwork's chief of policy and advocacy. "Barely 100 days into Trump's second term, working families are already being crushed by sticky inflation and slowing growth."
"A Trump-engineered recession will devastate working families, but the president refuses to stand down on his failed trade war, no matter the cost," added Jacquez, who previously advised former President Barack Obama and Sen. Bernie Sanders (I-Vt.).
The FOMC said Wednesday that "the risks of higher unemployment and higher inflation have risen," and opted to keep the federal funds rate at 4.25-4.5%. The committee has maintained the rate for the past three meetings, following a series of cuts last year.
Trump on Sunday pushed for a rate cut, and though he has backed off a threat to try to oust Fed Chair Jerome Powell, the president "could reconsider if the economy stumbles in the coming months," The Associated Press reported Wednesday.
According to the AP:
Asked at the press conference whether Trump's calls for lower rates [have] any influence on the Fed, Powell said, "[It] doesn’t affect doing our job at all. We're always going to consider only the economic data, the outlook, the balance of risks, and that's it."
If the Fed were to cut rates, it could lower other borrowing costs, such as for mortgages, auto loans, and credit cards, though that is not guaranteed.
Addressing Trump's evolving tariff policy, Powell said Wednesday that "if the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth, and a rise in unemployment."
Sharing a video of his remarks on social media, Sen. Elizabeth Warren (D-Mass.) stressed that Trump's tariffs mean higher prices.
Donald Trump's tariffs mean you could suffer higher prices and lose your job AT THE SAME TIME. Forget dolls, families will be forced to make impossible choices between necessities like food, housing, and health care.
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— Elizabeth Warren ( @warren.senate.gov) May 7, 2025 at 3:13 PM
In a Wednesday blog post, former Labor Secretary Robert Reich wrote: "Recall that last November, the single biggest reason voters gave in exit polls for choosing Trump was that he'd bring prices down... Although Trump has scaled back some tariffs and paused others as he seeks trade deals with foreign nations, his tariffs are already eating into household budgets."
Reich highlighted comments about price hikes from companies whose products include everything from baby supplies and laundry detergent to paper towels and tools. He also emphasized that "tariffs will particularly hurt small businesses."
"This bodes ill for American workers, since 80% of U.S. employment comes from small businesses with fewer than 500 workers. The likely result: higher unemployment," he explained, projecting price hikes and job losses this month. "But here's the question: Will consumers and workers realize Trump is the cause? And if they do, will they remember this by the November 2026 midterm elections?"
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Warren Asks the Fed to Reconsider Approval of Capital One-Discover Merger
"This decision will inflict serious harm on consumers and merchants, especially low-income consumers and small businesses," wrote Democratic Sen. Elizabeth Warren and Rep. Maxine Waters.
May 05, 2025
Democratic Sen. Elizabeth Warren of Massachusetts and Democratic Rep. Maxine Waters of California are urging the Federal Reserve to reconsider its approval of an impending merger between Capital One Financial Corporation and Discover Financial Services, a tie-up that critics have warned could harm consumers.
In a letter sent last week, Warren and Waters wrote that the decision to approve the merger by the Federal Reserve "was inconsistent with the legal requirements" under the Bank Holding Company Act. They also argued that it did not include a number of relevant assessments, including how the the merger would impact the "convenience and needs of the community" or the "competitive effects on the credit card market."
"This decision will inflict serious harm on consumers and merchants, especially low-income consumers and small businesses, and threaten the stability of the U.S. financial system," states the letter, which was addressed to Secretary of the Board Ann Misback and dated May 1.
Warren is the ranking member on the U.S. Senate Committee on Banking, Housing, and Urban Affairs and Waters is the ranking member on the U.S. House Committee on Financial Services.
The deal was announced in February 2024 and is valued at $35 billion. A report from the Consumer Financial Protection Bureau (CFPB) released right before the acquisition was announced found that the largest credit card firms charge much higher interest rates than smaller banks and credit unions.
The deal initially received some scrutiny around possible impacts to competition, but in April 2025 overcame a major obstacle when the U.S. Department of Justice (DOJ), now under the Trump administration, decided not to challenge the merger.
The Federal Reserve and the Office of the Comptroller of the Currency gave the deal the green light last month.
In response to the DOJ's decision not to challenge the merger, Morgan Harper, the director of policy and advocacy at the American Economic Liberties Project, wrote that "if the Trump administration green-lights the Capital One-Discover merger, it will be a betrayal of working-class Americans and small businesses." The American Economic Liberties Project is an anti-monopoly research and advocacy group.
"If the deal goes through, Capital One will become the largest credit card lender in the country, the first major issuer in decades to control its own payments network, and entrench its striking dominance in subprime credit card lending," Harper continued.
One noteworthy aspect of the merger, which is expected to be finalized mid-May, is that Capital One is set to acquire Discover's card network. This means the combined firm would be akin to a larger version of American Express, "a stand-alone integrated system that could use its millions of customers to push higher fees onto merchants," according to The American Prospect.
Capitol One currently uses Visa and Mastercard credit card networks, which operate an effective duopoly of global payment processing, but has said it would transition to the Discover card network, according the outlet CNET.
This aspect of the merger is without clear precedent and raises concerns about competition, according to Jesse Van Tol, the chief executive of the National Community Reinvestment Coalition, a group that is opposed to the deal, who spoke to The New York Times in April.
"The market power it gives them, and the opportunity it gives them to set pricing in ways that captures a lot of value for the company at the expense of the consumer, is significant," Van Tol told the Times.
In their letter, Warren and Waters alleged that the Federal Reserve failed to adequately scrutinize the competitive effect of this aspect of the deal.
"The board argued that given 'the significant, larger competitors that would remain,' and that Capital One doesn't currently own a network, there aren't any competitive concerns. The board completely missed the fact that the merger would provide Capital One with significant market power to increase interchange fees charged to merchants and reduce rewards and other benefits for consumers. It didn't grapple with the implications of vertical integration and network effects," the two wrote.
When considering the conveniences and needs of the community, Warren and Waters said in their letter that the Federal Reserve did not perform the prospective analysis required by law, and instead "focused on each bank's past performance under the Community Reinvestment Act (CRA)," even though "the convenience and needs of the community is a distinct legal factor, separate and apart from banks' past performance under the CRA."
The two also said that the Federal Reserve appears to not have taken into consideration relevant findings from the CFPB, the Federal Deposit Insurance Corporation, and the DOJ.
Bloomberg reported last week that the Federal Reserve received the letter and plans to response, per a spokesperson.
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