Support for the emergency lending facilities set up at the start of the pandemic has waned among Republicans who say it’s time to phase out the programs. By contrast, Democrats say cutting them off too soon jeopardizes the economic recovery.
Disputes around the programs became especially charged last month when Mnuchin said he would not extend most of them beyond the end of the year. Mnuchin also requested that the Fed return hundreds of billions of dollars that had been put toward the facilities but never spent, saying the money could be reallocated by Congress to directly reach distressed parts of the economy.
The announcement spurred a rare public clash between Treasury and the Fed, which wanted the programs to stay in place to continue backstopping the markets in case the recovery faltered. Democrats and several economists condemned Mnuchin’s move, saying it was premature to cut off the extra support. President-elect Joe Biden’s transition team called the decision “deeply irresponsible.”
At the hearing, Mnuchin said his decision reflects a legal interpretation of the Cares Act, adding that the programs were never meant to be in place indefinitely. Despite the initial rebuke, the Fed has agreed to return the unused money and is in the process of doing so.
“My decision not to extend these facilities was not an economic decision,” Mnuchin said Tuesday. He also dismissed criticism from the left that the move was politically motivated.
Republicans on the banking panel echoed Mnuchin, saying financial markets have healed since a tailspin in February and March. Sen. Patrick J. Toomey (Pa.), a top Republican on the panel, said the programs were designed for a specific purpose in the pandemic’s early days and that they should not be thought of as an evergreen supplement to fiscal policy.
“It’s always been the case that you could imagine some bad thing happening in the future, if some terrible thing were to happen to threaten the viability of our financial markets,” Toomey said. “There are some industries that are in big trouble. That is a true fact. … It’s up to Congress to decide what to do about that.”
The emergency programs that targeted small businesses and local governments have issued few loans, drawing criticism around those programs’ usefulness. Some economists have pushed the Fed and Treasury to loosen the lending terms and expand the programs’ reach. Fed officials have said the Main Street lending program, for example, could see more interest if businesses continue to struggle through the winter.
The programs only allow the Fed to lend money, with the expectation that those loans are repaid, while Congress can issue grants or direct payments through a stimulus package.
During the hearing, Senate Democrats said the programs should not be cut off.
Sen. Sherrod Brown (Ohio), the top Democrat on the panel, said Mnuchin was “trying to sabotage our economy on your way out the door.” Sen. Robert Menendez (D-N.J.) told Mnuchin at the hearing that “no one will be better off when you end the Cares Act facilities.”
“There is a choice here, and unfortunately the choice you’re making is very consequential,” Menendez said.
The recovery picked up speed faster than many economists expected, with unemployment falling to 6.9 percent in October. But there are mounting fears that a wintertime surge in coronavirus cases, plus uncertainty around another stimulus package, will claw back that momentum. Powell said the pace of improvement has moderated over the past few months, with spending on services like travel and hospitality remaining low.
“We can both acknowledge the progress and point out just how far we have left to go. The lion’s share of the credit should go to fiscal policy,” Powell said Tuesday.
In the backdrop are ongoing questions of whether Congress and the White House will reach a deal on another stimulus package. Powell has long maintained that fiscal support will be needed to keep the recovery on track, and Mnuchin has called for a targeted relief bill to fill the economy’s lingering gaps.
Negotiations around another stimulus package have broken up multiple times. On Tuesday, Senate Republican leaders circulated a plan that includes a liability lawsuit shield for businesses, small-business assistance and short-term, limited jobless aid, but did not include additional funding for state and local governments or transit agencies.
Earlier in the day, a bipartisan group of senators unveiled a roughly $908 billion stimulus proposal that includes $300 weekly unemployment benefits lasting four months as well as $160 billion in funding for state and local governments.
The package would also include a temporary moratorium on some coronavirus-related lawsuits against companies and other entities and funding for small businesses, schools, health care, transit authorities and student loans. Still, much remained in flux, and many congressional aides were skeptical the plan will become law.
Asked at Tuesday’s hearing about the bipartisan proposal, Mnuchin reiterated that more help from Congress was needed and said he looked forward to reviewing the pitch.
“I think what’s more important is what we can pass quickly on a bipartisan basis to target the most difficult parts of the economy,” he said.
When it comes to the government’s economic response, Powell said there is less of a risk to “overdoing it” than there is to “underdoing it.” With encouraging news about a vaccine, Powell said that many businesses and households can “see the light at the end of the tunnel … but they may need more help to get to that place.”
“We can see the end. We just need to get there,” he said.