Late Saturday, Toomey and congressional leaders reached a compromise that effectively clears the way for a stimulus deal. The middle ground would prevent exact copies of the expiring lending programs, including those for local governments and medium-sized businesses, from being created without congressional approval. But the Fed will hold onto its broader power to create new programs through its emergency lending authority.
On top of delaying a stimulus package, the fight briefly thrust the central bank into the political limelight it aggressively tries to avoid. The Fed stakes much of its reputation on being independent, and it has been a stabilizing force for the financial system since the pandemic began.
By Sunday morning, the central bank had not commented or issued a public statement on Toomey’s proposal or subsequent compromise. Even so, the Fed was inextricably caught in the middle.
“This is not just business as usual for the Fed,” said Karen Dynan, a former Fed staffer and chief economist at the Treasury Department who teaches at Harvard. “It’s just central banking 101: Try to keep monetary policy and the Fed’s emergency lending powers separate from political influences.”
Many economists and lawmakers agree the Fed’s swift, bold moves at the start of the recession helped stave off an ever deeper crisis. In March, the Fed slashed interest rates to zero, flooded the financial markets and boosted bond purchases. Through the Cares Act, Congress also allotted $454 billion to support a slate of emergency lending programs, which are run jointly by the Fed and Treasury Department.
Whether those programs were as effective as possible depends on whom you ask. Despite providing a backstop to the markets and helping them rebound, the Fed has been criticized for not doing enough to make loans available to medium-sized businesses and local governments, and those programs have seen little uptake. Democrats and Republicans agree some of the programs’ unused money could be put to more direct use in a stimulus bill.
Yet the programs’ limitations have also spurred Fed leaders to urge for more help from Congress. For instance, the Fed can only issue loans that must be paid back. Fed Chair Jerome H. Powell has repeatedly told lawmakers that direct grants, like those from the Paycheck Protection Program, may be a better option for companies that can’t take on more debt.
Powell has kept pressure on Congress while walking a fine line. He routinely stops short of telling lawmakers what should go into a stimulus package. He does not answer questions about fiscal policy that, he says, stretch beyond his purview. The Fed’s mandate aims for maximum employment and stable prices, and it is set up to act as a lender of last resort in only “unusual and exigent” circumstances.
But the lending programs, even before the latest stimulus battle, have tested the Fed’s restraint.
Last month, Treasury Secretary Steven Mnuchin announced the…
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