Update 476: Cong. to Heed Fed’s Fiscal Plea?
Know When Federal Spending is Cost Free
The window is closing for Congress to pass a much-needed corona relief/stimulus package. Prospects for a deal will be much slimmer in a lame duck session if Biden prevails as Republicans will likely be unwilling to boost the economy for a new Democratic administration.
But one idea that could get broad consensus is repurposing the unused money in the Treasury’s $454 billion CARES Act lending fund. With the Fed facilities it funded set to expire on December 31, there comes the inevitable question of what to do with the unused money. Redirecting these funds toward the fiscal use urged on Congress by Powell and Mnuchin this week, would provide a massive pay-for, that is, would be cost free.
Good weekends, all…
It was a busy week on Capitol Hill for Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin. Powell appeared in front of House Financial Services on Tuesday, the House Select Subcommittee on the Coronavirus Crisis on Wednesday, and finally Senate Banking Thursday morning. Mnuchin was alongside the Fed Chair on Tuesday and Thursday.
A familiar plea was sounded by both. Congress must pass additional fiscal relief to ensure the recovery continues. Powell made clear that the Fed is at its limits. Mnuchin echoed these sentiments, reiterating his willingness to reopen negotiations with Congressional leaders.
The stalemate has generated interest in the largely unused $454 billion CARES Act Title IV lending fund. Throughout the week, members questioned how the funds could be better allocated as Wall Street’s recovery outpaces Main Street’s. Below, we recap the week’s hearings and analyze how Congress can better serve the macroeconomy on a discounted basis.
Powell’s Calls for Relief
- House Financial Services: On Tuesday, Powell set the tone for his remarks throughout the week: economic activity has picked up from its second-quarter trough but remains well below its pre-pandemic levels. The Fed’s actions have soothed financial markets, and the central bank will continue to use all of its tools to aid the recovery. But the Fed alone cannot resuscitate the economy. Secretary Mnuchin struck a slightly different tone, touting “the fastest economic recovery for any crisis,” but generally agreed with Powell that more fiscal relief is necessary.
- House Select Subcommittee on the Coronavirus Crisis: On Wednesday, Powell testified alone and again emphasized the need for Congress to provide additional fiscal support. He underscored that the Fed’s role is to ensure the stability of the financial system and that it’s Congress’s job to provide targeted relief. As always, he was reluctant to take positions on specific fiscal policies.
- Senate Banking: The tone and message of yesterday’s hearing were similar to Tuesday’s, with Powell and Mnuchin agreeing on the need for more relief. Mnuchin was more detailed than Powell, broadly outlining a “targeted” proposal that kids and additional PPP loans to hard-hit businesses. Mnuchin specifically highlighted the restaurant and hospitality industries as desperately needing assistance.
The Fed Saves Markets, Not Individuals
While the real economy continues to suffer, capital markets have been comparatively robust. After an initial shock in March, the Fed’s early interest rate cuts and thirteen 13(3) emergency lending facilities restored liquidity to the markets and shored up investor confidence. The Fed has so far prevented another financial crisis.
But the Fed’s powers are not unlimited, and Congress cannot rely on the Fed to carry out economic policy in this crisis. Both Powell and Mnuchin recognized the limits of their powers as Mnuchin said during Tuesday’s hearing, “I, unfortunately, think there’s not more we can do… Almost every single one of the facilities has extra capacity.” That may be an understatement. The Treasury has committed $195 billion of CARES Act Title IV funds to the Fed’s 13(3) facilities. The Fed can leverage these Treasury equity investments for $1.95 trillion in lending, but so far has only lent $18.9 billion.
Wall Street is starting to recognize the limits of economic relief rooted in lending rather than spending. After a strong spring and summer, the S&P 500 has been on a downward trend since September 2 with many analysts blaming the stalled relief negotiations. Without additional fiscal support for the real economy, more small businesses will shutter, more workers will be laid off, and more tenants will be unable to pay rent. All of which will ripple through the macroeconomy and into the financial system.
Funds Available for Fiscal Relief
As the capital markets are flush with liquidity, there’s momentum building for repurposing the Title IV funds for fiscal relief. The CARES Act specifies that the Treasury’s $454 billion Title IV funds must be used to support lending activity at the Fed. As such, it will take congressional action to free up the funds for fiscal use.
In both the House and Senate hearings, Mnuchin requested that Congress repurpose at least $200 billion of the uncommitted funds for the administration’s priorities: “kids and jobs.” The concept of repurposing has bipartisan appeal. In July, Senator Schumer announced the Economic Justice Act, which would repurpose $200 billion of the Treasury’s Title IV funds for investments in communities of color.
Beyond the $259 billion of Title IV funds that remain uncommitted, there is also the $75 billion investment in the Main Street Lending Program (MSLP). Some members, such as Senate Banking Chair Crapo, are arguing for modifications and greater investment in the MSLP. But further loosening the program’s terms will only have marginal impacts in a program that has still only lent 0.2 percent of its total capacity. As Powell noted during his testimony, “…most creditworthy small and medium-sized businesses can currently get loans from private-sector financial institutions.”
Powell also stated that lowering the minimum loan size below $250,000 for the MSLP will be unlikely to generate uptake since the Fed is currently not seeing demand for loans under $1 million. Doubling down on the MSLP with the uncommitted funds will not provide non-creditworthy businesses the fiscal relief they need.
Unlike other Fed facilities such as the Municipal Liquidity Facility, the MSLP is not backstopping a large credit market. The comparatively lower efficacy of its backstop function means that the MSLP Title IV funds may have a greater impact if repurposed toward an area such as state and local fiscal aid. During the Senate Banking hearing, Sen. Kennedy lamented the lackluster performance of the MSLP and questioned if its Treasury funds could be repurposed. Sec. Mnuchin indicated that he’d be open to the idea.
House Responds to Powell’s Request
Speaker Pelosi and House Democrats signaled their willingness to re-enter negotiations, announcing a $2.4 trillion draft proposal on Thursday afternoon. The new bill is substantially smaller than the $3.4 trillion HEROES Act but still well above the $1.5 trillion figure floated by the Trump Administration.
It appears that Chair Powell’s exhortations may finally be reaching a more receptive audience. At least one Democrat, Ways and Means Chairman Rep. Richard Neal, said that the decision to restart negotiations was driven in part by Powell’s pressing.