MNI EXCLUSIVE: Congress Curbs Fed Backstop, Defers Wider Fight

U.S. lawmakers' fiscal package blocks the Federal Reserve from re-opening four emergency lending facilities announced in March but stops short of blanket restraints on its crisis powers, deferring a bigger political fight over tackling the economic slump, former Congressional and Fed officials tell MNI.

"The language of the stimulus bill regarding Fed facilities is less restrictive than feared -- only facilities that are 'the same' as those shut down can't be restarted, except for TALF," said Roberto Perli, a former Fed board economist now at Cornerstone Macro. TALF is the Term Asset-Backed Securities Lending Facility.

The legislation "restores the Fed's emergency lending powers to where they were before" the so-called CARES Act brought in this spring during the pandemic, said Thomas Hogan, a former chief economist for Republicans on the Senate Banking Committee.

That means the Treasury can still allow the Fed to create "broad-based financial market lending programs such as those used during the 2008 financial crisis," Hogan said. The one exception is a restriction on the Fed using the Exchange Stabilization Fund for any CARES Act lending other than TALF, he said.

Lawmakers depart Washington for a holiday break largely leaving in place the battle lines they drew when Treasury chief Steven Mnuchin announced the 13(3) programs would expire at the end of the year: the municipal liquidity facility, the Main Street lending program, and primary and secondary corporate credit facilities. That could set up new fights when Joe Biden and Janet Yellen take over in January and face a Senate that could still be led by Republicans over limits on the Fed's emergency toolkit.

BOGGING DOWN THE FED

Beyond closing down some lending powers, it's notable the USD900 billion relief package also excluded state and local governments that Chair Jerome Powell and other officials call vital to protecting jobs and important services during the pandemic, former Fed officials told MNI.

The Fed took the rare step of issuing a statement after Mnuchin's move saying the 13-3 programs would be beneficial to extend. Powell later testified at Congress that he did that so markets would know the Fed was still doing all it could to boost market functioning and confidence. At the same time, some of the Fed's programs were little used and lawmakers had urged Powell to make it easier for small firms to benefit.

Fed credit policy has divided Republican and Democratic lawmakers for months, but unexpectedly flared up over the weekend and almost derailed relief negotiations. The exact wording of the statute was unknown until hours before lawmakers voted and was important in determining what it what it could mean for the central bank going forward.

"My strong preference would have been that it steer clear of legislative changes that could bog down the Fed's ability to respond timely to credit market emergencies," said Richard Roberts, a former New York Fed staffer. "We are in the midst of very challenging economic and financial times and now is not the time for political theatre."

YELLEN MAY MOVE ON

The political fight will likely dissuade a Yellen-led Treasury from spending a lot of energy on re-opening the four terminated programs, says Nathan Sheets, a former top Fed and Treasury official.

"Those 13(3) facilities under the CARES Act are really a backstop as opposed to a bridge," said Sheets. "Getting the economy back to something approximately normal as quickly as possible is what they will have to focus on." The economy remains at risk of "scarring" and re-opening the facilities would only provide major benefits "if financial markets hit turbulent times again," he said.

The Fed may not need new powers to act on that file. Section 14(2)(b) of the Federal Reserve Act allows the central bank to directly purchase municipal debt with maturities of less than six months, said Sarah Raskin, former Fed governor and former deputy Treasury secretary and now a senior fellow at Duke University's law school.

"In the best scenario, providing economic assistance to state and local governments is a way to keep layoffs from happening to people like teachers, firefighters, librarians and mental health professionals," Raskin said.