A political battle looms over the Fed’s emergency lending programs
The success of the Federal Reserve emergency loan programs in stabilizing financial markets is fueling a political battle over whether programs should be extended.
Divisions over their future are magnified by the partisan deadlock in Congress over whether provide more economic stimulus. Democrats, awaiting the elected president
inauguration in january, see the programs as a potential tool to provide more aid if Congress fails to act, while some Republicans fear relying on the central bank’s lending powers as a substitute for congressional spending decisions.
The brawl could open a wedge between the Fed and the Treasury Department, which have mainly worked together smoothly this year to provide emergency support after the coronavirus pandemic Wall Street upset. The Treasury launched the programs with the central bank in March and April after the unrest threatened to freeze credit flows to small businesses, large corporations, cities and states.
Stock markets rebounded in the days following the announcements of the programs and recovered rapidly in the following months.
A decision not to renew the programs risks disrupting markets by weakening a key source of insurance that has fueled investor optimism, said Roberto Perli, a former Fed economist who is now an analyst at Cornerstone Macro. They could also deny some businesses and governments access to low-cost credit if market conditions deteriorate.
“In the midst of a recovery, it would be difficult for the Treasury to justify such a move on economic policy grounds,” said Glenn Hubbard, a Columbia University economist who served as a senior adviser to President George W. Bush. “There is a precautionary argument to continue the installations because their presence has calmed down.”
With markets in much better shape and an improving economy, the Treasury is facing pressure from some Republican lawmakers and members of the Trump administration to end programs.
“They fulfilled their mission better than we had hoped. We don’t need to artificially intervene when the markets are back to normal, ”said Sen. Pat Toomey (R., Pa.), Who is set to become chairman of the Senate Banking Committee if the Republicans keep it up. control of the Senate.
Mr Toomey said he was concerned the programs could be used by Democrats to make spending decisions that should instead be up to lawmakers. “I really think this is a bad way to go,” he said. “These programs under different management could be very, very badly used. “
Democratic lawmakers see at least two of the programs – one that buys short-term state and municipal debt and another that lends to small and medium-sized businesses and non-profit organizations-as potential tools to bring further relief to hard-hit businesses and governments, especially if Congress doesn’t provide more stimulus.
In a letter last week to Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin, Senate Minority Leader Chuck Schumer (D., NY) and three colleagues called for swift expansion of these two programs and warned that banks would stop receiving new loan applications in a few weeks. to avoid being stuck with loans that cannot be delivered by December 31st. “The fast approaching expiration date… is dangerously premature,” they wrote.
Some Fed officials say the programs should be renewed because they appear to be functioning effectively as a safety net. They fear upsetting financial markets before the pandemic ends, especially amid concerns that increased virus cases could cause further economic weakness or market volatility.
“If that was me, I would extend them all,” Cleveland Fed Chairman Loretta Mester said on Monday. “The fact that they exist gives confidence to the markets.”
The decision rests with Mr Mnuchin and the Fed’s board of governors, headed by Mr Powell. The Fed and Treasury rolled out a series of programs this spring, including five in which the Treasury provided Congress-approved $ 195 billion in funding to cover losses. These followed the Fed’s emergency measures to cut its benchmark interest rate to near zero and buy vast sums of government securities after the markets began to freeze.
When the programs were due to expire at the end of September, the Fed and the Treasury announced an extension more than two months in advance, giving borrowers and banks arranging some of the loans sufficient notice.
Eric Rosengren, chairman of the Boston Fed, which administers the Main Street Lending Program which targets small and medium-sized businesses, said on Tuesday it was important to make a decision quickly on any extension so that lenders arranging these loans can plan. Consequently. “Banks probably need some certainty about how long the program will be in existence,” he said.
Mr Powell, at a press conference last week, gave no opinion on an extension, which he said officials were only beginning to discuss.
A senior Treasury official said on Monday that the administration had made no decision on extending the programs, but the official cited reasons why the programs may no longer be needed, including a significantly improved economic and financial environment. . The official said the Treasury is also aware of the risk that the Fed will be drawn deeper into fiscal policy decisions if the programs remain in place after meeting their market stabilization targets.
Another senior administration official raised the possibility that while some programs could be withdrawn, the Main Street loan program could be extended due to the threat to the economy from increasing cases of virus.
Fed and Treasury officials have touted the programs as successful, especially those used to support high-quality corporate debt markets. Corporate bond issuance surged in the weeks and months after the Fed announced it would buy up to $ 750 billion in large corporate securities. As a result, the programs were used lightly, with the Fed buying about $ 13 billion of that debt.
As part of the Fed’s municipal debt purchase program, the central bank bought two securities worth $ 1.65 billion, one from the state of Illinois and the other from the Metropolitan Transportation Authority of New York.
In an October 16 letter, the Treasury Department told a congressional oversight committee that it did not believe the city and state loan program should continue beyond December 31.
The imminent transition of presidential administrations further complicates matters. In 2008, President George W. Bush’s Treasury Department postponed key decisions regarding impending auto industry bailouts, for example, to allow the incoming Obama administration greater discretion over how to structure these programs. .
A spokeswoman for the Treasury declined to comment on any plans to discuss the matter with Mr Biden’s transition team. If the Trump administration decides not to extend the programs, Mr. Biden’s Treasury Department could determine whether to reactivate them somehow after the new administration takes office on the 20th. January.
Write to Nick Timiraos at [email protected]
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