As pandemic relief negotiations continue to stall in Congress, the latest major obstacle has emerged; a battle over the Fed’s ability to channel tens of billions of dollars to state and local governments – a largely-unused provision in the Cares Act which expires on Dec. 31.
Democrats want to preserve this option for what the Wall Street Journal editorial board describes as a plan “to use the Fed to go around Congress if they don’t control the Senate next year,” while Republicans – led by Sen. Pat Toomey (R-PA) – want to repurpose approximately $429 billion in Cares Act funding to finance roughly half of the new spending.
According to the report, the Fed only made $25 billion in loans and other commitments because the majority of businesses and municipalities were able to borrow more cheaply in the private market.
That Democrats are opposing the Toomey language gives away that their plan is to use the Fed to go around Congress if they don’t control the Senate next year. They’re afraid a GOP Senate won’t agree to another spending blowout to rescue profligate states like Illinois and New Jersey. They want to use the Fed’s municipal and state lending facility, which was stood up this year at the height of the pandemic and market disruption, as the bailout vehicle. –Wall Street Journal
At present, Fed Chairman Jerome Powell has agreed to return the unused portion of the funding to the Treasury, following the request of Secretary Steven Mnuchin. If the Cares Act is allowed to lapse on Dec. 31, a Biden Treasury would require a new appropriation from Congress to restore the programs.
The Journal also notes that after the $429 billion is repurposed for Covid relief, the Fed will still control some $35 to $40 billion as a cushion for various pandemic facilities – which could then be leveraged as much as 10x to lend to cities and states on terms set by the Biden Treasury and the Fed.
Democrats, meanwhile, say the fight is over the Fed’s ability to prevent an economic collapse.