Some Republicans now want to pare back the Fed’s reach as part of a stimulus deal, wary that the Fed may use programs set up through the earlier stimulus effort, the Cares Act, to become something more akin to a lender of “first resort” instead of “last resort," as Sen. Patrick J. Toomey (R-Pa.) put it Thursday. By contrast, Democrats are concerned Republicans are slashing the Fed’s broader authority, which has been a stabilizing force for the economy, just weeks before the Biden administration takes over.
The Fed faced similar existential threats in the years after the 2008 financial crisis and recession, and lawmakers eventually did reshape the central bank’s oversight over the financial system to guard against another downturn. But now, the Fed is embroiled in a new battle over its powers and independence, just as the recovery is backsliding and the pandemic escalates into a wintertime surge. Jobless claims for the unemployed are rising again after trending downward, and retail sales slipped in November, a month that historically kicks off a strong holiday shopping season.
“What the current [Republican] proposal on the table appears to be is something that goes well beyond the Cares Act,” said Bharat Ramamurti, a Democratic member of the Congressional Oversight Commission, which focuses on the recovery efforts of the Fed and Treasury Department. “This proposal isn’t just, ‘let’s go back to the world as it existed the day before the Cares Act.’ It’s actually a significant reduction of the authorities that the Treasury and Fed had before the Cares Act.”
On Friday, Democratic lawmakers firmly rejected Toomey’s proposal, saying that the call to curb Fed powers is thwarting a relief bill, as well as threatening the Fed’s independence. With lawmakers likely to seek unanimous consensus on a stimulus vote, Toomey’s plan for the Fed programs, which on Thursday he called “the most important thing to me,” could hold up negotiations headed into the weekend.
“These authorities should be maintained to allow for the Federal Reserve to act to prevent hardship to families across the country,” Senator Michael Bennet (D-Colo.) said in a statement. “If ever there is a time to put politics aside and do the right thing, it should be in the middle of a pandemic and corresponding economic crisis.”
Toomey defended his position Friday afternoon and emphasized that the emergency lending programs that received Cares Act money were always intended to close out at the end of the year.
“The language Senate Republicans are advocating for affects a very narrow universe of lending facilities and is emphatically not a broad overhaul of the Federal Reserve’s emergency lending authority,” Toomey said.
The coronavirus pandemic spurred the Fed into one of its most active years ever. In the pandemic’s early days, the Fed reached far beyond its playbook from the Great Recession in ways that economists say prevented an even deeper recession. As the coronavirus spread beyond China and U.S. stocks plunged into the red, the Fed quickly slashed interest rates to zero in March. A sprawling set of programs to flood the markets and boost bond purchases further helped reinvigorate the financial system. Plus, the Fed also rolled out loan programs to struggling businesses and local governments.
Federal Reserve Chair Jerome H. Powell has repeatedly said the slate of emergency lending programs propped up in the spring were not meant to be permanent.
“When the time comes, after the crisis has passed, we will put these emergency tools back in the box,” Powell said at a news conference Wednesday.
The Fed’s lending programs for businesses and local governments have not been blemish-free. Considering how much money was set aside, the Main Street lending program and municipal lending programs haven’t been well utilized, with critics saying the loans carry onerous requirements. Some Republicans have also bristled at Powell’s repeated calls on Congress to pass a stimulus bill that can fill the economy’s remaining gaps, although Powell stops short of making specific suggestions for what should go into legislation.
The Fed’s vast response has attracted some criticism. Some Republicans argue the Fed is venturing beyond its mandate, which strives for maximum employment and stable prices. Speaking to reporters on Thursday, Toomey said the Fed shouldn’t be engaging “in fiscal policy, social policy or allocating credit," and instead should leave those decisions to elected leaders on Capitol Hill.
Meanwhile, Democrats have pushed the Fed in the opposite direction. Many wanted to widen the Fed’s lending programs so they could help more businesses and local governments on the brink. Liberal policymakers also want the Fed to put more focus on racial inequality and climate issues, arguing they pose risks to economic growth.
The Fed is one of the most powerful financial institutions in the world, and much of its reputation rests in its independence from the White House. The chair cannot be fired by the president over policy differences — a question which came up when Powell was on the receiving end of President Trump’s routine attacks. Fed governors are unelected officials, subject to Senate confirmation, and can fill terms of up to 14 years.
But a highly-partisan climate in Washington, mixed with the Fed’s large footprint, have made for a fraught combination.
Brian Gardner, chief Washington policy strategist at Stifel Financial Corp, said there’s “always this give and take about Fed independence,” with the facilities emerging as the latest flash point.
“I think there are a lot of Republicans saying, ‘wait a second, what’s going on here?’" Gardner said. “This is a way to send a message to the Fed about who’s in charge.”
Tensions over the Fed’s lending programs ramped up last month when Treasury Secretary Steven Mnuchin announced the programs would wind down at the end of 2020 and requested that the Fed return hundreds of billions of dollars that went unspent. The move was met with a rare rebuke from the Fed and widespread disagreement from Democrats, who say the facilities are an important backstop and could have had more reach.
There’s agreement from both parties that some of the programs’ unused money could be put to more direct use. But the larger debate about the Fed’s own authority emerged when Toomey, the incoming leader of the Senate Banking Committee, said he is also pushing for a bill that prevents the expiring programs, or anything remotely similar to them, from being created in the future. For example, once the Main Street lending program expires, Toomey warned against a “Main Street lending program 2."
Toomey insisted the Fed’s emergency lending powers “remain on the books” and that the door would still be open for Congress to approve entirely different programs “if in the future, some dire emergency occurs.”
“We’re not changing the role of the Fed at all,” Toomey said. “We’re saying these programs were meant to be temporary, and they’re going to be temporary.”
That argument was soundly rejected by Democrats, many of whom say Toomey’s proposal goes far beyond the nuts and bolts of a coronavirus relief bill. Democrats said the move cuts into lending powers the Fed had well before the Cares Act and handicaps the central bank’s ability to combat future crises.
“What’s happening here is a rewriting of the Fed’s emergency powers at the last minute, without any hearing, without any debate of what the implications are,” Ramamurti said.
Democrats argue that Toomey’s plan takes away any chance for the Biden administration to revamp the programs.
In a statement Friday, Brian Deese, Biden’s pick for director of the National Economic Council, said the stimulus package shouldn’t “include unnecessary provisions that would hamper the Treasury Department and the Federal Reserve’s ability to fight economic crises."
“Undermining that authority could mean less lending to Main Street businesses, higher unemployment, and greater economic pain across the nation. Congress’s good faith effort to deliver immediate relief should not be delayed by provisions that could put our future financial stability at risk,” Deese said.
Democratic lawmakers also said Toomey is using the Fed as a political instrument in the final days of the lame duck session.
“It’s no surprise that Republicans are drawing a line in the sand over their ability to sabotage the economy, and tie the Biden administration’s hands," Sen. Ron Wyden (Ore.), the ranking Democrat on the Senate Finance Committee said in a statement.
Toomey disputed the criticism, saying the Cares Act programs were always meant to be temporary, and that he’s held this view for months.
Jeff Stein contributed to this report.