Federal Reserve Chairman Jerome Powell, nudged by Senate Banking Committee Democrats on Tuesday to endorse more fiscal action, shied away from taking sides in a congressional battle over another economic rescue package, including aid to state and local governments.
In joint testimony with Treasury Secretary Steven Mnuchin, Powell disappointed Democrats who sought to push him to back spending in addition to the nearly $3 trillion that Congress has already provided in four economic relief bills. The two appeared remotely.
In recent weeks, Powell has tried to walk a fine line by encouraging Congress to pass additional fiscal relief without overstepping the nominally apolitical central bank’s bounds. He’s repeatedly warned about the long-term economic consequences from an anemic federal response, saying now is not the time to worry about deficits or inflation.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said in a May 13 interview with the Peterson Institute for International Economics. “Additional fiscal support could be costly, but worth it if it helps avoid long-term damage and leaves us with a stronger recovery.”
Democrats have pounced on Powell’s remarks. Speaking on the floor Tuesday, Senate Minority Leader Charles E. Schumer used his recent comments to push for more congressional action. He expressed hope that Powell’s testimony would “jolt [his] Republican colleagues into action.”
But Powell sounded a more cautious note Tuesday, saying he wanted merely to point out a risk, not tell Congress what to do. “I do think we need to take a step back and ask, over time, ‘Is it enough?’" Powell said.
“Senator, we try to stick to our knitting over here,” Powell told Sen. Bob Menendez, D-N.J., who has a bipartisan proposal with Sen. Bill Cassidy, R-La., that’s recently gained traction that would give states and localities $500 billion more.
Powell noted that state and local governments employ around 13 percent of the American workforce and that balanced budget laws could force them to make painful cuts.
Democrats in the House passed a $3 trillion relief package on May 15, but Senate Republicans say it has no chance of passage, arguing that Congress should wait and see how the economy responds to the bills already passed and the winding down of social distancing rules.
Senate Banking Democrats asked Powell repeatedly to weigh in on more money for state and local governments decimated by revenue shortfalls, as well as additional grants and payments to support struggling households and businesses. But Powell resisted, hewing closely to the course he has already charted.
State and local budgets faced a similar revenue shortfall during the 2008 recession, which led to large job losses that deepened the economic downturn and slowed the recovery.
Before the hearing, Mnuchin met with Vice President Mike Pence, Senate Majority Leader Mitch McConnell and House Minority Leader Kevin McCarthy. “The vice president and I just had a good update with Mitch McConnell and Kevin McCarthy,” Mnuchin told reporters before going to the hearing. “I think it was very helpful.”
Mnuchin has been the White House’s lead negotiator on the last two coronavirus relief bills. But McCarthy said the meeting wasn’t about new legislation.
“I don’t see the need right now,” McCarthy said, adding that they discussed the economy, states reopening and COVID-19 testing.
Powell and Mnuchin noted that the Fed, with Treasury’s blessing and using emergency powers, has created 11 credit facilities in response to COVID-19, nine of which were funded by the money appropriated by Congress in March. They said $195 billion of the $454 billion provided by Congress has been committed to backstop the lending programs, and Mnuchin said he was ready to allocate the rest after getting the already announced facilities up and running.
Powell also said the mere announcement of facilities was enough to calm some lending markets without having to actually make a loan. But he and Mnuchin said they expect the Main Street Lending Facility, yet to become operational, to get considerable use. Powell said the facility should be operational by the end of May, as should the Municipal Liquidity Facility to help state and local governments issue short-term bonds.
The Main Street facility will use $75 billion from the Treasury to support up to $600 billion in loans to midsize businesses with up to 15,000 employees or $5 billion in revenue in 2019.
Mnuchin said the Treasury was ready to take losses on those loans, signaling a willingness to lend to harder-hit businesses that may struggle to repay the debt.
Republican Sen. Martha McSally of Arizona — who polls show has been trailing her 2020 Democratic challenger, former astronaut Mark Kelly — echoed President Donald Trump’s reelection campaign strategy of blaming China for the pandemic. McSally questioned Powell aggressively on the Fed’s hiring of BlackRock Inc. to help run the central bank’s corporate credit facilities, attacking the massive asset manager for its financial ties to Chinese companies.
“What, if anything, can we do to keep their profits from this actually benefiting China?” McSally asked.
“I’ll just say this: All large asset managers buy Chinese securities,” Powell responded. “I’m not here to defend or criticize them for that. It’s just not really relevant to the work.”
On the other side of the aisle, Sens. Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts tested out a line of attack that Trump can expect on the campaign trail this year, putting the screws to Mnuchin over the lack of robust job retention requirements on companies using the Fed facilities.
“Am I right, that you’re not requiring companies to use the money they borrow to keep their workers on the payroll?” Brown pressed Mnuchin.
“Mr. Senator, I am following what was the exact letter and spirit of the law that we negotiated with you and others on a bipartisan basis,” Mnuchin said. “On some of these facilities, there are specific requirements, and I assure you that the Chair [Powell] and I are absolutely enforcing those requirements as required.”
The law prohibits companies receiving direct loans from the Fed from buying back shares or issuing dividends until a year after the loans are repaid and places restrictions on executives’ pay. The law also directed the Treasury secretary to “endeavor to seek” the creation of a lending facility aimed at midsize businesses with strict requirements to restore 90 percent of the workforce, allow union organizing and prohibit offshoring jobs.
Instead, Mnuchin and Powell established the Main Street Lending Program, which only asks borrowers to make “commercially reasonable” efforts to retain workers.
The other lending facilities don’t include those restrictions, Warren noted during her questioning. She called on Mnuchin to impose them, and to also hold company executives personally liable for providing false information or misusing the Fed funds. Mnuchin responded by noting that Congress laid out specific restrictions on the airlines’ bailouts, implying an intentional lack of similar rules on the Fed facilities.
“That’s right, and the rest was left up to you, and what you’re saying is that you won’t do it,” Warren said. “We’re in a situation where 35 million Americans have filed for unemployment. You’re in charge of half a trillion dollars. You’re boosting your Wall Street buddies, and you are leaving Americans behind.”
“I think that’s a very unfair characterization, and these issues were discussed with both Republicans and Democrats at the time,” Mnuchin said. “You were not necessarily part of those discussions, but these were completely discussed.”
COVID-19 has decimated the U.S. economy with unparalleled speed and savagery, prompting unprecedented levels of federal spending in response that some fear still might not be enough. More than 36 million Americans have applied for unemployment insurance since early March, meaning nearly a quarter of U.S. workers employed in February have been furloughed or fired. Mnuchin and Powell will continue to appear quarterly to report on their efforts to stanch the economic devastation caused by the virus and kick-start a recovery.