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House subcommittee considers tweaks to Fed's emergency lending powers


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House subcommittee considers tweaks to Fed's emergency lending powers

A House Financial Services subcommittee debated whether the Fed's emergency lending facilities helped the economy weather the COVID-19 pandemic or if changes needed to be made before another crisis occurs.

Part of the Fed's response near the beginning of the COVID-19 pandemic was using its emergency lending authorities to help prevent a freeze-up in credit conditions. The facilities' goals included helping corporate bond markets stay liquid, helping state and local governments manage their cash flows and working with banks to provide loans to small and medium-sized businesses.

Subcommittee on National Security, International Development and Monetary Policy Chairman Jim Himes, D-Conn., said during a Sept. 23 hearing that the facilities were not used much, but it is possible the markets were calmed simply by the Fed's commitment to backstopping them.

"Within days of the Fed announcing programs to bolster the corporate municipal bond markets, investors returned, liquidity increased, and further disaster was likely avoided," Himes said. "But this power only goes so far. Despite markets calming efforts, the pandemic still forced hundreds of thousands of businesses to close and pushed unemployment rates to unacceptable levels."

Himes recommended that both Congress and the Fed consider ways to improve emergency lending efforts for a future economic crisis.

"Congress' job is to make sure that those tools remain sharp and effective and ready to take on whatever challenge comes next," Himes added.

Ranking member Andy Barr, R-Ky., however, emphasized the need to know when to stop using a tool.

"As the crisis abates and economic conditions improve, the Fed must put those tools back in the box," he said. "Reliance on and utilization of the Fed's emergency lending powers in excess of their intent risks blurring the lines between monetary and fiscal policy."

Like Himes, Barr raised the question of whether the limited usage of the programs means the Fed was unsuccessful in accomplishing its goals. Or, he added, was "the existence of the facility enough to normalize the markets, allowing issuers to finance their operations through standard market channels"?

Connecticut Treasurer Shawn T. Wooden told lawmakers the Fed programs were effective, and in states like Connecticut, they helped stabilize marketplace access. Connecticut did not sell notes to the Fed's Municipal Liquidity Facility. Only Illinois and New York's Metropolitan Transportation Authority did.

Christopher Russo, a post-graduate research fellow at the Libertarian Mercatus Center at George Mason University, urged the subcommittee "to safeguard the Federal Reserve's independence by keeping the Fed out of credit policy." Russo formerly advised policymakers in the Federal Reserve System.

"Using the Fed for credit policy damages its independence, making it less effective in the next crisis," he said.

In advance of the hearing, the committee released a discussion draft of infrastructure legislation, and the funding would include allowing the Federal Reserve System to buy debt instruments, such as National Investment Authority bonds, with limitations. Himes' office did not immediately respond to a question about whether or when the proposal will be introduced.