Powell Says No Rift With Mnuchin, Signals Fed Not Stepping Back
(Bloomberg) -- Federal Reserve Chair Jerome Powell indicated Wednesday that there was no rift between the central bank and Treasury Secretary Steven Mnuchin over the sunsetting of emergency lending programs.
Concerns of a dispute emerged on Nov. 19 when Mnuchin announced that he will sunset a handful of the emergency lending programs rolled out to support the pandemic-ridden economy and authorized under the Cares Act at year end as the law subscribed.
Shortly after Mnuchin requested that Powell return unspent money in the funds, the Fed released a terse statement saying it wanted “the full suite” of measures to be maintained to support a still-suffering economy.
That message wasn’t meant to show division between the Fed and the Treasury Department, Powell said Wednesday in response to a question during testimony before the House Financial Services committee.
“Our thinking is not about the Cares Act money, it’s more about the economy,” Powell said about the reason for issuing the rare statement last month. “We were concerned that the public would interpret this as the Fed stepping back -- and that’s not the case. We needed to send a signal saying this.”
Mnuchin’s latest decisions related to the Fed’s lending facilities for struggling businesses and local governments prompted strong partisan reactions, showing the charged political atmosphere that his presumed successor, Janet Yellen, will face as she takes over if approved by the Senate next year.
One of her earliest decisions may be what to do with the five lending facilities that Mnuchin says will sunset at the end of this year. The use of the programs -- which span from helping Main Street businesses to corporate bond programs -- has been underwhelming.
Mnuchin, who was seated alongside Powell during the hearing, said at the hearing that he has discussed the loan facilities with Yellen.
Mnuchin has said he will put $455 billion of unspent Cares Act money into Treasury’s General Fund, where after Dec. 31 the agency would need Congressional approval to tap.
Reaction to Mnuchin’s announcement was split down party lines, with Democrats unleashing on him for “burying” money that the U.S. economy desperately needs, and for what they say is breaking the law.
“Whether it sits in the general account, whether it sits in the” Exchange Stabilization Fund over which the Treasury secretary has more discretion, “all of this is completely governed by the law,” Mnuchin said. “If Congress wants to change the law -- that’s fine.”
Representative Cindy Axne, an Iowa Democrat, and her colleagues disagreed, arguing the Cares Act leaves open the door for Mnuchin to keep using unspent money into next year.
Representative Maxine Waters, head of the committee, echoed that saying: “The Cares Act was passed to stabilize the economy for the entirety of the pandemic.”
But Mnuchin countered that view in back-to-back hearings this week.
“I find it implausible that any member of this committee believed that in voting for the Cares Act, you were authorizing me to make $500 billion in loans in perpetuity,” he told lawmakers. “You must read in this that there was a loophole in the law that I could invest $500 billion forever.”
Powell said he is deferring to Mnuchin on the legal interpretation: “The Secretary has sole authority over the Cares Act funding under the Cares Act,” he said. “His reading of the law thus is the authoritative one and we accept it.”
Pressing for stimulus
Powell also urged Congress in the hearings to approve additional stimulus spending as the Covid-19 crisis ramps up over the next few months, focusing aid on on unemployed workers, small businesses and state and local governments.
“There are many sectors that could use some help,” Powell said. “I would start with the labor market. I think we ought to remember that despite the rapid progress in getting people back to work, which is so welcome, there is still 10 million people who are out of work because of the pandemic.”
Powell and his colleagues at the Fed have been advocating for months for more government stimulus -- noting that monetary policy can only do so much. The central bank slashed its benchmark interest rate in March to near zero and has held it there since.
Proposals emerged Tuesday to break the deadlock over additional aid, reflecting the rising concerns that the economy needs another boost. Covid-19 cases are surging, threatening the fledgling recovery and causing more states to announce restrictions on business activity.
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“There is a lot of work left to do there,” Powell said of aiding jobless workers. “The unemployment insurance programs are expiring at year end. That is an area where I would certainly look.”
Small businesses will struggle to endure until widespread vaccines are available, Powell said, citing a recent meeting with community bankers.
“There are just a lot of smaller businesses in their communities who will struggle to make it through this winter. Covid is moving up in the cold weather. People are staying in. It is going to be tough on a lot of small businesses.”
Powell gave no indication how the central bank may respond to the risk of fading economic momentum when it meets Dec. 15-16, though he reiterated that it would use all of its tools to help the economy recover.
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