A political flare-up over the Federal Reserve’s pandemic crisis lending programmes has emerged as a late stumbling block to a $900bn fiscal stimulus package as US congressional leaders rushed to complete the deal.
On Thursday afternoon, Pat Toomey, a Republican senator from Pennsylvania, sought to insert a provision in the legislation that would prevent the Fed from reviving several emergency credit facilities that are due to expire at the end of the year.
“I think we have very, very broad agreement among Republican senators that this is the right approach, and [Treasury] secretary [Steven] Mnuchin shares that view,” Mr Toomey told reporters.
The Republican move was met with opposition from Mark Warner, the Democratic senator from Virginia and a crucial player in the stimulus negotiations, who said it would limit US policymakers’ ability to fight the economic fallout from the coronavirus pandemic.
“Tying the hands of the Fed and Treasury to combat not only the remainder of the current crisis, but future crises as well, would be a terrible mistake,” Mr Warner said in a statement to the Financial Times. “It would undermine confidence in our ability to respond to economic shocks and set a troubling precedent that eroding the independence of our central bank.”
The unexpected hurdle concerning the Fed’s lending programmes came as congressional leaders said talks could stretch into the weekend to resolve final sticking points.
“While many, if not all, of the difficult topics are behind us, a few final issues must be hammered out,” Chuck Schumer, the top Senate Democrat, said on Thursday. “We are very close to an agreement, but the details really matter.”
The agreement under discussion would be the largest economic relief package in US history after the $2.2tn Cares Act, which was passed in late March during the early stage of the Covid-19 pandemic in the US.
The legislation would exceed the $787bn price tag of the stimulus plan enacted by Barack Obama in 2009 after he took office in the midst of the global financial crisis — and is seen as increasingly important given the coronavirus-driven slump in the labour market recovery and weakness in retail sales.
In the early stages of the pandemic, the Fed created several emergency lending facilities with congressional authorisation and funding from the Treasury department to prop up financial markets. But last month, against the wishes of the central bank, Mr Mnuchin instructed the Fed to close down a number of them at the end of the year.
The schemes due to end include ones that bought corporate and municipal debt and others that purchased asset-backed securities and made loans to medium-sized businesses.
Jay Powell, the Fed chairman, and Janet Yellen, the incoming Biden administration’s choice for Treasury secretary, were expected to be able to revive the facilities without congressional approval if needed, but Mr Toomey’s proposal would require a greenlight from lawmakers that could be difficult to secure.
“Aside from the short-term consequences, what Toomey is trying to do here risks gutting the whole Fed authority to act in any future emergencies, not just this one,” Roberto Perli, an economist at Cornerstone Macro, wrote on Twitter.
It was unclear to what extent the last-minute haggling over the Fed facilities might jeopardise the stimulus talks. In addition to the dispute over Fed lending, disagreements persisted over the final terms of unemployment benefits and direct payment cheques to US individuals, as well as the inclusion of disaster relief aid for cities and states, a special pot of money for independent entertainment venues and the extension of a federal moratorium on evictions.
Democratic and Republican lawmakers in Congress had hoped to reach a compromise by Friday night, when funding for government operations is due to expire. But they said they might have to extend the deadline by a few days in order to allow more time for negotiations.
“We are going to stay right here until we are finished, even if that means working into or through the weekend,” Mitch McConnell, the Republican Senate majority leader, said. “Our citizens can’t afford for us to get bogged down in the back-and-forth. Let’s finish up our bipartisan framework. Let’s make law as soon as possible.”