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Political Battle Looms Over Fed's Emergency Loan Programs

11/10/2020 | 02:57pm EST

By Nick Timiraos

The success of the Federal Reserve's emergency lending programs in stabilizing financial markets is fueling a political battle over whether the programs should be extended.

Divisions over their future are being amplified by partisan gridlock in Congress over whether to provide more economic stimulus. Democrats, looking ahead to President-elect Joe Biden's inauguration in January, see the programs as a potential tool to deliver more aid if Congress doesn't act, while some Republicans are worried about relying on central bank lending powers as a substitute for congressional spending decisions.

The tussle could open a divide between the Fed and the Treasury Department, which have mostly collaborated smoothly this year over providing emergency support after the coronavirus pandemic convulsed Wall Street. The Treasury launched the programs with the central bank in March and April after that turmoil threatened to freeze the flow of credit to small businesses, large companies, cities and states.

Stock markets rebounded in the days after they announced the programs and staged a rapid recovery in the following months.

A decision not to renew the programs risks unsettling markets by weakening a key source of insurance that fueled investors' optimism, said Roberto Perli, a former Fed economist who is now an analyst at Cornerstone Macro. They could also deprive some businesses and governments of access to low-cost credit if market conditions worsen.

"In the midst of a recovery, it would be difficult for Treasury to justify such a decision on economic policy grounds," said Glenn Hubbard, a Columbia University economist who served as a senior adviser to President George W. Bush. "There is a precautionary argument for continuing the facilities as their presence has been calming."

With markets in much better shape and the economy improving, the Treasury is facing pressure from some Republican lawmakers and some within the Trump administration to wind the programs down.

"They have served their purpose better than we had hoped. We don't need to be artificially stepping in when the markets have returned to normal, " said Sen. Pat Toomey (R., Pa.), who is in line to become chairman of the Senate Banking Committee if Republicans maintain control of the Senate.

Mr. Toomey said he is concerned that the programs will be used by Democrats to make spending decisions that should instead reside with lawmakers. "I feel really strongly that's a bad road to go down," he said. "These programs under different management could be very, very badly misused."

Democratic lawmakers see at least two of the programs -- one that buys short-term debts of states and municipalities and another that is lending to small and medium-size businesses and nonprofits -- as potential tools to deliver additional relief to hard-hit companies and governments, especially if Congress doesn't provide more stimulus.

In a letter to Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin last week, Senate Minority Leader Chuck Schumer (D., N.Y.) and three colleagues urged a speedy extension of those two programs and warned that banks would stop taking new loan applications within weeks to avoid being stuck with loans that can't be delivered by Dec. 31. "The fast-approaching expiration date...is dangerously premature," they wrote.

Some Fed officials say the programs should be renewed because they appear to be working effectively as a backstop. They are wary about roiling financial markets before the pandemic is over, especially amid concerns that rising virus cases might yield renewed economic weakness or market volatility.

"If it were me, I would extend all of them," Cleveland Fed President Loretta Mester told reporters Monday. "The fact that they exist provides confidence to the markets."

The decision rests with Mr. Mnuchin and the Fed's board of governors, led by Mr. Powell. The Fed and Treasury established an array of programs in the spring, including five in which the Treasury provided $195 billion in funding approved by Congress to cover any losses. Those followed emergency actions by the Fed to cut its benchmark interest rate to near zero and to purchase vast sums of government securities after markets began seizing up.

When the programs were set to expire at the end of September, the Fed and Treasury announced an extension more than two months beforehand, giving borrowers and banks that arrange some of the loans plenty of advance notice.

Eric Rosengren, the president of the Boston Fed, which is administering the Main Street Lending Program that targets small and midsize businesses, said Tuesday it was important to reach a decision on any extension soon so that lenders arranging those loans could plan accordingly. "Banks probably need some certainty about how long the program will be in existence," he said.

Mr. Powell, at a news conference last week, didn't offer any opinion on an extension, which he said officials were only beginning to discuss.

A senior Treasury official said Monday the administration had reached no decision about whether to extend the programs, but the official cited reasons why the programs might no longer be needed, including a much improved economic and financial-market backdrop. The official said the Treasury was also mindful of the risk that the Fed could be pulled deeper into fiscal policy decisions if the programs remain in place after they have achieved their market-stabilization objectives.

A different senior administration official held out the possibility that while some programs might be retired, the Main Street Lending Program could be extended due to the threat posed to the economy by increasing virus cases.

Fed and Treasury officials have touted the programs as a success, especially those used to backstop markets for investment-grade corporate debt. Corporate bond issuance surged in the weeks and months after the Fed said it would buy up to $750 billion in securities of large corporations. As a result, the programs have been lightly used, with the Fed buying around $13 billion of such debt.

Under the Fed's program to purchase municipal debt, the central bank has bought two securities worth $1.65 billion -- one from the state of Illinois and another from New York's Metropolitan Transportation Authority.

In an Oct. 16 letter, the Treasury Department told a congressional oversight panel that it didn't believe the loan program for cities and states needed to continue beyond Dec. 31.

Further complicating matters is the looming transition of presidential administrations. In 2008, President George W. Bush's Treasury Department deferred key decisions about looming rescues of the auto industry, for example, to allow the incoming Obama administration greater discretion about how to structure those programs.

A Treasury spokeswoman declined to comment on any plans to discuss the issue with Mr. Biden's transition team. If the Trump administration decides not to extend the programs, Mr. Biden's Treasury Department could determine whether to reactivate them in some fashion after the new administration takes office Jan. 20.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

11-10-20 1457ET

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