Federal Reserve fight imperils relief talks

Haggling over the special lending facilities at the Federal Reserve has become a major stumbling block to clinching a crucial COVID-19 relief agreement.

Democrats say attempts to shut down emergency lending facilities will tie the Fed’s hands, taking an inexpensive and effective tool for boosting the economy off the table.

Republicans spearheaded by Sen. Pat Toomey (R-Pa.) say the emergency facilities were set up in March as temporary measures, and fret that Congress will cede fresh power to the Federal Reserve if the COVID-19 bill doesn’t explicitly shut down the facilities.

“The CARES Act provided extraordinary, but temporary emergency lending facilities,” he said. “We did that because we recognized as a consequence of the economic shutdown that we were experiencing back in the March-April timeframe, financial markets were in imminent danger of freezing up.”

That danger, he added, had long since subsided.

The issue has drawn out negotiations over the $900 billion COVID-19 relief bill, which would extend expiring emergency unemployment benefits, restore $300 in additional weekly benefits, revive the Paycheck Protection Program for small businesses affected by the pandemic, and approve a new round of stimulus checks.

Because the emergency relief is tied to a $1.4 trillion omnibus funding bill, the Fed issue is also increasing the likelihood of a shutdown Friday night at midnight, though Congress is eyeing a stopgap to put off the deadline until Sunday.

At issue are a handful of special Federal Reserve lending facilities that Congress created in March’s CARES Act to ensure that credit was available to struggling businesses and municipalities during an economically unstable environment.

Because the Federal Reserve is not allowed to lose money on its loans, Congress agreed to risk some of the $500 billion it put toward the programs to cover any losses. With that cash in the bank, the Fed was able to create a slew of facilities that would buy up bonds and serve as a lender of last resort to businesses and municipalities having trouble borrowing on the open market.

The plan worked, getting markets flowing again by boosting lenders’ confidence that they would not be stuck holding bonds in a panicked market where nobody wanted to buy or sell. 

But last month, Treasury Secretary Steven Mnuchin said he would shutter five of the funds — the Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility, Municipal Liquidity Facility, Main Street Lending Program and the Term Asset-Backed Security Loan Facility — and request that the Fed return the $455 billion that remained to the Treasury.

In response to the letter, the Fed put out an unusually direct statement on its policy preferences, saying it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

On Friday afternoon, Democrats began a full court press against the policy, saying that it would hamstring the incoming Biden administration, and even tie the Fed’s hands in future crises.

“If implemented, this unprecedented change to the law would block the Federal Reserve from ever creating lending facilities that help small businesses and state and local governments, taking away one of the important tools to fight this or any future economic crisis,” House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) and Ways and Means Committee Chairman Richard Neal (D-Mass.) said in a joint statement.

Biden’s team also weighed in on the matter, arguing the facilities are an important backstop in the event that the economy hits rough waters again.

“The package should not include unnecessary provisions that would hamper the Treasury Department and the Federal Reserve’s ability to fight economic crises,” said Brian Deese, whom Biden has tapped as the next National Economic Council director.

Economists say that the unprecedented explosion in COVID-19 cases could spell trouble for the economy in the coming months, even as inoculations with safe and effective vaccines roll out.

“The pathway to a sustainable positive growth rate could be more difficult and more complex to attain than previously anticipated given the reduced level of control that policy makers have to spur the economy back to prosperity,” said Stifel Chief Economist Lindsey Piegza.

“In all likelihood, the road ahead will be long, bumpy and uncertain with party politics adding volatility along the way and the virus itself determining the path to recovery,” Piegza added.

Toomey dismisses the notion that the policy was meant to hamper Biden.

“Quite contrary to what some of my Democratic colleagues have suggested, this is not at all an effort in any way to hamstring the Biden administration or weaken our economy. That is a ridiculous notion,” he said.

The policy, he added, was “emphatically not a broad overhaul of the Federal Reserve’s emergency lending authority.”

Instead, he argues that the lending facilities served their purpose in stabilizing markets, and otherwise did little to help businesses.

“The vast majority of the money that was allocated for this purpose was never used,” Toomey noted.

Worse, Toomey says that without new legislation, a future administration could use existing legal authority to reopen the Fed facilities and circumvent Congress. A Congressional Research Service report found that even though legislation seemed to slate the facilities to expire on Dec. 31, the legal language only barred future administrations from setting up altogether new facilities.

If Biden has trouble convincing Senate Republicans to pass aid to state and local government, a provision Republicans axed from the current COVID-19 relief package, he might use the municipal bond facility to pump them up with cash, Republicans argue.

Some Democrats agree that it could be a useful backstop if Congress reaches a stalemate.

George Selgin, the director of the Center for Monetary and Financial Alternatives at the libertarian Cato Institute, says both sides’ arguments are overwrought and should not hold up a much-needed deal.

“Either party could back down and you’d have not a terrible outcome,” he said.

While he agreed that the lending facilities could be useful for some medium-sized businesses and local governments in the coming months, he also said they were unlikely to significantly move the needle, especially compared to major fiscal stimulus from Congress.

Similarly, Biden would not be able to completely repurpose the facilities as Republicans describe without agreement from Federal Reserve Chairman Jerome Powell and the five-person board of governors, only one of which is a Democrat. 

An easy compromise, Selgin said, would be to simply tighten rules around emergency lending facilities. 

The far bigger calamity than either side getting its way on the issue, he said, would be sinking a crucial economic relief bill.

“It’s like a game of chicken, except that nobody is going to crash if the other person blinks,” he said. “But if they keep going like this, they’re going to have a tragedy.”