Congress is pulling the reins on Fed and Treasury emergency loan programs


The Federal Reserve and Treasury may have to return to Congress to reopen emergency loan programs and pose a complicated legal conundrum for the new Biden administration to get help for troubled businesses and places.

On Tuesday, key policy makers suggested Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin ask Congress to re-approve all new programs after nine of the Fed’s 13 liquidity facilities expired on December 31st.

Several facilities are designed to reduce cover loans to small and medium-sized enterprises and state and local governments, while others prop up the asset-backed and corporate bond markets.

“If something terrible happens that threatens the viability of our financial markets, the Treasury Department and the Fed should come back to Congress at this point and ask for the appropriate facilities,” said Senator Pat Toomey (R., Pennsylvania).

Toomey is about to succeed Senator Mike Crapo (R., Idaho) as head of the Senate Banking Committee, making him a powerful voice in the debate over the Fed and Treasury Department’s response to the COVID-19 crisis.

Powell and Mnuchin testified before the Senate Banking Committee for the first time since their public mockery of the expiration dates. Powell has since agreed to return over $ 400 billion in unused funds from the Coronavirus Aid, Relief and Economic Security (CARES) Act, passed in March, but reminded Congress that the facilities helped “advance organizations keep it closed ”and allow employees to stay on the payroll.

Treasury Secretary Steven Mnuchin (left) and Federal Reserve Board Chairman Jerome Powell testify about the CARES Act and the economic impact of the coronavirus during a Senate Banking Committee hearing on Capitol Hill in Washington on Thursday, September 24, 2020 -Pandemic. (Drew Angerer / Pool via AP)

Mnuchin and Powell agreed that the Treasury Secretary had sole power to terminate the programs and withdraw funds from the Fed facilities. Mnuchin added that the Treasury Department had “no discretion” over how that money was used other than returning it to the Treasury Department’s general fund.

“My decision not to expand these facilities was not an economic decision,” Mnuchin told the committee.

What will the Biden administration do?

But Toomey’s claim that the Fed and Treasury would have to return to Congress to reopen their facilities remains an open legal issue. And Mnuchin’s interpretation of the use of the reclaimed funds could be different with the next Treasury Secretary, who would be former Fed chief Janet Yellen until confirmed by the Senate.

Neil Barofsky, a former inspector general of the $ 700 billion Troubled Asset Relief Program (TARP), told Yahoo Finance last week that Mnuchin is “inventing” his interpretation of the CARES Act. He suggested that the Biden government could reverse Mnuchin’s move by reallocating funds from the General Fund to the Treasury Department’s stock market stabilization fund.

The ESF, currently under $ 80 billion available, could then be used to resume liquidity facilities. The question is whether a Yellen-led Treasury Department will argue with Republicans in Congress over a legal interpretation of Trump administration’s legislation.

For his part, Powell said the economy will need more help going forward as millions are still out of jobs.

“We can both acknowledge [economy’s] Make progress and indicate how far we have to go, ”Powell told lawmakers. “The lion’s share of the loan should go to fiscal policy.”

Brian Cheung is a reporter who covers the Fed, the economy, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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