Toomey calls for Fed special loan programs to end, setting up clash with Democrats

By Victoria Guida
·6 min read

The Federal Reserve has doled out billions of dollars in emergency loans to keep the economy afloat during a crippling pandemic, garnering broad bipartisan praise.

Now, the lawmaker who is likely to head the powerful Senate Banking Committee if Republicans keep control of the Senate is signaling that the Fed should stop.

“If someone wants to make the case that we need the government to give money to people or businesses because they’re struggling, by all means you can make that case,” Sen. Pat Toomey told POLITICO. “But that’s not a Fed exercise.”

The Pennsylvania Republican believes that the central bank’s emergency programs — which he called “wildly successful” — should wind down at the end of the year, a spokesperson confirmed. He’s concerned that if the programs are extended, they will be seen as a substitute for fiscal policy, the tax and spending decisions that are the responsibility of Congress and the president.

“That would be a huge mistake,” he said.

While the Fed is an independent agency whose board makes its own policy decisions, it is overseen by the Banking Committee and is sensitive to its views.

Toomey’s stance could put him at odds with the next presidential administration, which will want to continue to prime the pump as much as possible to boost the economy as the coronavirus crisis shows little sign of abating.

It will also set up a conflict with Democrats, such as House Financial Services Chair Maxine Waters (D-Calif.), who have faulted the Fed for not doing enough to provide financing for state and local governments, as well as small and midsized businesses that are relying on temporary lending programs.

They have urged the central bank to make the loan terms more generous as the darkening financial outlook for many companies and municipalities heightens the risk that even more Americans will be put out of work.

But Republicans like Toomey, who have historically sought to limit the central bank’s role in the economy, say the Fed’s emergency lending programs have largely served their purpose.

The mere existence of the programs helped restore stability to the financial system after panic over the coronavirus earlier this year threatened to shut down key debt markets. That means borrowers can go to private markets to obtain funds at reasonable rates without needing to turn to the Fed, GOP lawmakers say.

The divergent opinions put the Fed, which seeks to avoid the political spotlight, in an awkward position as the parties debate how much additional money is needed to sustain the economic recovery.

“I would not want to turn what are supposed to be liquidity backstop credit programs into a fiscal, giving-away-money program,” said Toomey, who also sits on a congressional watchdog overseeing $500 billion in coronavirus relief funds.

The emergency lending facilities are already set to expire at the end of the year, though the Fed and the Treasury Department, which together have authority for designing the programs, could choose to extend that deadline. Fed Chair Jerome Powell told reporters Thursday that they were “just now turning to that question” and had not made a decision.

The central bank might want to maintain its ability to buy corporate bonds on the open market in case investors once again get spooked. It has made more than $13.4 billion in purchases so far, one of its most controversial moves during this crisis, with critics saying it’s propping up weak firms and subsidizing large ones like Apple and Amazon that don’t need help.

If Joe Biden wins the presidency, a new Treasury secretary would also have the power to nudge the Fed to take on more risk in who it lends to. The Fed, in consultation with Treasury Secretary Steven Mnuchin, has been extending credit with the expectation that most of the funds will be paid back. That means the aid won’t go to some of the borrowers that need it the most.

Neither the Fed’s municipal lending program nor its “Main Street” lending program — intended for businesses and nonprofits with fewer than 15,000 employees — have come close to doling out all of the funds that are potentially available.

Treasury has set aside as much as $75 billion of CARES Act relief money to cover potential losses from up to $600 billion in Main Street loans, although only about $4 billion in loans have been made under the program, which opened its doors this summer.

Similarly, the Fed has only lent to two entities through its municipal facility: Illinois and New York’s public transit system.

A Biden-appointed Treasury secretary could take a different tack.

“What will be the attitude of the new Treasury secretary who can get through a Republican confirmation?” said Peter Conti-Brown, a Fed expert at the Wharton School of the University of Pennsylvania. “Is it going to be more hands off? Is it going to be more dictating terms?”

He noted that banks have been hesitant to make loans under the Main Street program — under which the Fed will buy 95 percent of a bank loan to a qualifying company or nonprofit — because they still have to do extensive underwriting and bear the risk if a loan defaults.

“The Main Street program has been criticized for having a cumbersome procedural structure that was instigated by the Treasury, so it’s possible that gets relaxed and might see a lot more take up,” Conti-Brown said.

In the meantime, some Democrats have criticized the Fed for not doing more to make the terms attractive to key sectors of the economy that are struggling.

Last Friday, the Fed did move to make its “Main Street” program available to more small firms by lowering the minimum loan amount to $100,000 from $250,000, which could provide struggling small businesses with a low-cost lifeline as the pandemic rages on. But it’s unclear if that will push up demand for the Fed-backed loans.

Bharat Ramamurti, a former aide to Sen. Elizabeth Warren (D-Mass.) who now serves on the Congressional Oversight Commission with Toomey, said the Fed should ensure that state and local governments don’t needlessly lay off workers by lowering the rate they charge municipal borrowers and lengthening the terms of the loan.

“To me, it is consistent with the overall mandate of the Fed to provide this money in a way that seeks to promote employment, and I think the state and local program is the most obvious example of that,” Ramamurti said.

“The relevant section of the CARES Act says this money is supposed to be used to address liquidity problems related to Covid,” he said. “It’s a huge stretch to read the word liquidity as just ensuring that private markets provide the loans.”

Zachary Warmbrodt contributed to this report.