Update 440 — Fed Chair Powell to Congress:
Spend Much More, Fast, or Risk Depression
Approaching Memorial Day, it is now two months ago that Congress approved $2.1 trillion in spending in response to the economic impact of the Coronavirus. About 98 percent of all COVID fatalities in the U.S. have occurred since then.
How have the programs worked? What should we be doing now? We look at the performance to date of the biggest spending package ever — and perhaps more importantly— assess whether more spending is required, and if so, on what, how much, and how soon?
Yesterday, Senate Banking held a hearing on the Treasury’s quarterly report on its implementation of the CARES Act. Treasury Secretary Mnuchin and Federal Reserve Chair Powell reported on their efforts to assist struggling businesses, states, and municipalities through the CARES Act, which appropriated half a trillion in funds to the Treasury for various programs in conjunction with the Fed. Treasury has disbursed only $37.5 billion to one of its corporate bond facilities, per the Congressional Oversight Commission’s first report released Monday. Senate Democrats were dismayed how little Treasury has done to date.
Below, we recap the hearing, note areas of bipartisan agreement, and detail Democratic priorities for the next coronavirus package.
Fed Facilities/Fiscal Relief
Secretary Mnuchin leads the White House’s negotiating team, as the Treasury oversees many fiscal relief programs.
Treasury responsibilities relevant to the hearing include:
- assistance to American workers and families (direct cash payments);
- assistance for small businesses (Paycheck Protection Program, administered jointly with the Small Business Administration);
- assistance for states, localities, and tribal governments; and
- administration of job preservation programs (e.g. Employee Retention Credit, payroll tax deferral, payroll support, and others)
The Fed has supported the economy and financial markets through other means. Early on, the Fed lowered interest rates to near-zero, issued forward guidance (assurances that rates would stay low), and purchased securities to smooth market functioning and credit flow. With approval from the Treasury, it backstopped money market mutual funds, lent to banks and securities firms, and relaxed regulatory requirements. The Fed, wading deeper into markets than ever before, is lending to businesses by purchasing $750 billion in corporate bonds. It plans to stand up a facility to support “small”- and mid-sized businesses by the end of the month.
The Program is described as a small business-oriented program, but it’s for businesses too small to float debt on the public markets. Eligible firms must have 15,000 employees or fewer and/or have 2019 annual revenues of $5 billion or less. The minimum loan amount is $500,000. Not many barbershops, beauty salons, or sole proprietorships want loans that size. The Fed started this effort in mid-March with little to no experience in this space, and they are already facing criticism for moving too slowly.
What Went Down at the Hearing
In the first accountability hearing since the passage of the $2.2 trillion CARES Act in March, Fed Chair Powell and Treasury Secretary Mnuchin sat down to deliver testimony and answer questions via video-conference. Both witnesses offered sober views on the country’s economic outlook, while diverging on the path the economy will take.
Chair Powell, breaking from his practiced habit of not commenting on fiscal policy, urged Congress to “do everything” it can to help those suffering amid the pandemic. Secretary Mnuchin downplayed the need for more aid and warned of more long-term damage to the macroeconomy the longer states and businesses are shut down. Powell disputed the idea of a tradeoff between public safety and economic growth.
The Fed Chair, seeking to avoid explicitly advising the legislative branch on its responsibilities, called for more fiscal relief to state and local government. Imperiled states and localities may start laying off public sector workers, creating ripple effects throughout economies and communities. The Fed, which has exhausted much of its more traditional monetary firepower and is taking on new duties and standing up lending facilities, is looking for a wingman in Congress.
Republicans’ calls to get America back to work immediately (while giving businesses blanket immunity should their workers fall ill) continue to draw the ire of Democrats. Speaking for the Trump administration, Mnuchin was adamant about re-opening economies and lifting stay-at-home orders — much more so than the ever-cautious Powell.
The hearing comes at a time when Congress is negotiating another round of coronavirus-related relief. While Republicans oppose another relief bill, Banking Committee Democrats are fighting for more assistance for workers, small businesses, and states. Here are a few Democratic priorities voiced during the hearing:
- Hazard Pay: Ranking Member Brown asked the witnesses whether it was fair that essential workers received such low wages. After Mnuchin began to state his thanks to essential workers, Brown dismissed Mnuchin’s gratitude as meaningless and hypocritical absent support for hazard pay and higher wages.
- Wage Replacement: Sens. Jones and Warner, two of the four sponsors of the Paycheck Security Act, voiced concern for the millions of workers who have lost their jobs. Powell testified that 40 percent of US households with incomes below $40,000 experienced job loss within the last two months.
The proposed Paycheck Security Act, similar to Rep. Jayapal’s Paycheck Recovery Act, would replace the wages of all laid-off or furloughed workers up to $90,000. Workers would return to payrolls at no additional cost to their employers.
- Corporate Accountability: Sen. Warren pressed Mnuchin over his abdication of payroll requirements for CARES Act fund recipients. She asked explicitly whether he would require such companies to keep workers on payroll. Mnuchin equivocated, stating that he was simply following the requirements of the CARES Act. Warren rebutted that the bill gave him authority to establish additional rules for fund recipients. The Fed adjusted the payroll requirements established in the CARES Act for its Main Street Lending Program so that recipients only have to make a “reasonable effort” to maintain payroll.
Warren asked whether Mnuchin will hold company executives personally liable and subject to criminal penalties if they lie or misuse bailout funds. Mnuchin said he would review the law.
- State and Local Solvency: The CARES Act appropriated $150 billion to assist states and localities with the coronavirus response, but states and localities are prohibited from using these funds to address decreased revenue. With more people losing jobs and less consumer activity, states and localities are facing massive budgetary shortfalls from diminished tax revenue. Sen. Menendez directed Powell to a bipartisan letter requesting that the Fed establish another emergency facility to buy medium and long-term municipal bonds directly and on the secondary market.
We saw glimpses of bipartisanship at the hearing. Republicans and Democrats shared concerns about Fed lending facilities, assistance to small businesses and workers, as well as the risk-averse nature of lending policy to date. But this bipartisan moment is unlikely to last as we enter the next round of Senate negotiations over the Corona IV package. Republicans appear more concerned about re-opening the economy than continuing to provide needed relief to workers and businesses.