Stimulus Compromise Doesn’t Resolve Fed Emergency Powers Debate
(Bloomberg) -- A compromise reached during pandemic relief talks over restrictions on the Federal Reserve doesn’t resolve differences in how Republicans and Democrats view its emergency lending authority, setting up a potential clash over how the central bank is able to respond to future crises.
Senator Pat Toomey, a Republican from Pennsylvania, insisted on tacking a provision onto the $900 billion stimulus plan that would prohibit the Fed from restarting programs supporting corporate bonds, small and mid-sized companies, and municipalities, which are set to expire on Dec. 31.
Democrats resisted but agreed to a compromise: Lawmakers deleted language from Toomey’s proposal that also banned “similar” programs from ever being launched without Congressional approval.
“Democrats made a fair point that it was too broad and it may have captured facilities that we didn’t intend to capture,” Toomey said Sunday in a conference call with reporters.
But Toomey also said the compromise wording would still ban “clone” programs without fresh approval from Congress. The intent of shutting the programs “could not be subverted by simply creating a clone and calling it something different,” he told reporters.
Toomey made clear his view that those programs always lay outside the Fed’s emergency authority and would not have been possible without the Cares Act, passed in March, that provided funding to backstop the programs.
“Those programs were complete departures from traditional, historical, normal Fed 13(3) functions,” he said, referring to the section of the Federal Reserve Act that authorizes emergency lending.
Democrats, however, interpreted the compromise language differently. One Democratic congressional aide who’d seen the provision said the new language imposes no meaningful limits on the Fed’s ability to create new facilities for state and local governments and small businesses. The Fed could create new programs with small differences, said the aide, who asked not to be named because they were not authorized to speak publicly about the pending legislation.
The apparent gap in interpretations sets up a possible clash if financial markets were to plunge back into chaos and the Fed felt it necessary to act quickly with similar facilities.
Former Fed Chairman Ben Bernanke issued a rare public warning on Saturday urging that the central bank’s ability to respond to future crises be left “fully intact.”
Toomey said Sunday that he’d consulted with Fed Chairman Jerome Powell when crafting his original provision, and that Powell “did not object.”
“He and I spoke during the course of this, and there was no effort on the part of Chair Powell to block this or change it,” Toomey said.
Fed spokeswoman Michelle Smith declined to comment.
The compromise over the boundaries of the Fed’s emergency lending powers late Saturday -- competing interpretations aside -- paved the way for lawmakers to reach agreement on a broader economic relief and government funding bill. The final agreement on the broad package is expected to be released Sunday and could be voted on later in the day.
Toomey said the compromise achieved four key goals for Republicans: sweeping unused Cares Act money out of Fed and Treasury accounts, shutting down the Cares Act facilities, banning those programs from being re-opened, and preventing clones from being created without express approval from Congress.
Toomey, as he did last week, vigorously denied that his provision was designed to limit the power of the Fed or hinder the ability of the incoming Biden administration from dealing with economic challenges.
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