Toomey Says New Bill Won’t Curb Fed’s Emergency Lending Powers
(Bloomberg) -- Senator Pat Toomey, who says he will only back a new pandemic stimulus bill if it bars the Federal Reserve from resuscitating several of its soon-to-end crisis lending programs, insists this will not blunt the central bank’s broader emergency powers.
The Pennsylvania Republican has made his support of the roughly $900 billion congressional proposal conditional on it including language that will prevent the Fed from subsequently restoring five programs it is being forced to wind down on Dec. 31.
“What this does is it says that nobody can revive or create a duplicate of the programs that received Cares Act money,” Toomey said in a conference call with reporters Thursday. “We are not changing the role of the Fed at all. The 13(3) legislation remains on the books, and the Fed’s 13(3) authority will continue.”
Section 13(3) of the Federal Reserve Act allows the central bank to create emergency lending programs during “unusual and exigent circumstances” and with approval from the Treasury Department. This provision proved vital in the early stages of the pandemic when Fed Chair Jerome Powell and his colleagues acted aggressively to quell investor panic by standing up a range of lending facilities to prevent financial markets from seizing up.
Several of those facilities were backed with funds appropriated by Congress in the Cares Act, including support for small and medium-sized borrowers, municipalities and corporate bond issuers.
Treasury Secretary Steven Mnuchin said the Cares Act mandates a year-end expiration date for those facilities, and has instructed the Fed to end them. Some Democrats contest this interpretation of the law and claim Republicans are trying to handicap the incoming administration of President-elect Joe Biden.
Florida Democratic Representative Donna Shalala and Bharat Ramamurti, who both serve on the Cares Act congressional oversight commission, issued a joint statement calling Toomey’s proposal “radical and reckless.”
“It limits the ability of the Biden Administration to address our current economic crisis and it undermines the Fed’s ability -- not just now, but indefinitely -- to respond to future financial crises,” they said.
‘Lender of First Resort’
Toomey argued that keeping these programs in place past the Dec. 31 expiration risked turning the Fed into a “lender of first resort” instead of the lender of last resort -- the key function of any central bank -- and would politicize an agency that is supposed to be independent.
“It is not the role of our central bank, the Fed, to engage in fiscal policy, social policy or allocating credit,” he said.
Fed spokesman Darren Gersh didn’t immediately respond to a request for comment.
Fed watchers were wary of any move that tied the hands of the central bank in fighting future financial fires.
“I think it’s legitimate to encourage the Fed to only use its full powers when there’s a commensurately bad downturn, but their tools are extremely important,” said Ethan Harris, Bank of America Corp.’s head of global economic research. “Trying to restrict the Fed’s ability to support capital markets, that obviously reduces the power of the Fed to deal with crises.”
The central bank has already seen its 13(3) powers narrowed after the 2008 financial crisis, when it was criticized for overstepping its authority and venturing into fiscal policy terrain.
Roberto Perli, a partner at Cornerstone Macro, said what matters is how the language in the bill is written.
“The risk is that it greatly diminishes the ability of the Fed to exercise its emergency powers and support the economy in the next crisis,” he said. “If I were the Fed, I would strenuously oppose this.”
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