The heads of the U.S. Treasury Department and Federal Reserve told lawmakers May 19 they will move quickly to launch emergency lending facilities that have been in the works since late March, saying they expect the programs to launch by the end of this month.
Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell faced questions at a Senate Banking Committee hearing on whether they are moving too slowly and cautiously with the loan programs, which are intended to stabilize a U.S. economy facing a historic shock from the coronavirus crisis.
Congress is relying on the Treasury and Fed for a major portion of its coronavirus response: providing loans to businesses, states and local governments as widespread closures have led to a massive drop in their revenues. As part of a major fiscal package Congress approved in late March, lawmakers allocated $454 billion to the Treasury Department so that it can provide a credit backstop to the Fed, which is limited in the losses it can absorb. The central bank will use the Treasury credit protection to make upwards of $4 trillion in loans.
"The [lending] facilities are a critical component of a strong economic recovery, which reinforces the need to have them quickly operational, broadly available and as flexible as possible," said Sen. Mike Crapo, R-Idaho, the committee's chairman.
The top Democrat on the committee, Ohio Sen. Sherrod Brown, also pressed both agencies to ensure the money quickly flows to essential workers rather than just "big banks or big corporations."
Two months after lawmakers signed off on the $454 billion for the Treasury credit backstops, the agency has only allocated $37.5 billion of the funds to help the Fed launch a facility that will assist corporate bond markets, according to a May 18 report from the Congressional Oversight Commission in charge of reviewing the loan programs.
Two major Fed lending programs have yet to launch: the $600 billion Main Street Lending Program for small and medium-sized businesses and the $500 billion Municipal Liquidity Facility to help state and local governments manage their cash flows.
The two agencies have also only mapped out a way to use 40% of the $454 billion, which some lawmakers worry may be too timid of a response given that the unemployment rate may rise to Great Depression-era levels.
Mnuchin and Powell sought to alleviate those concerns during the May 19 hearing, with Mnuchin saying he expects the Main Street and municipal facilities to be up and running "by the end of the month." Powell agreed, but provided the caveat that the launch of the new Fed facilities could stretch a "day or two into June."
Mnuchin also told lawmakers that the Treasury is "fully prepared to take losses" in the loan programs and therefore will not be overly cautious in assisting cash-strapped businesses.
"Let me be clear: I am prepared to allocate the rest of [the $454 billion]," Mnuchin said. "The only reason I have not allocated it fully is we are just starting to get these facilities up and running. We want to have a better idea as to which one of the facilities needs more capital as well as the potential for adding additional facilities."
Powell also promised quick action from the Fed, whose coronavirus response is now making the central bank a key player in areas it has traditionally steered clear of. In its response to the 2007-09 financial crisis, the central bank launched several emergency lending facilities largely aimed at stabilizing financial markets.
The Fed has relaunched several of those crisis-era facilities, but it is also stepping into new territory with lending facilities that will directly assist businesses and local governments across America.
"All of them are complex and challenging — the Main Street [facility] is in a class by itself, really," Powell told lawmakers. "It's a really complex undertaking, and people are working literally around the clock and have been for weeks to get it ready by the end of this month."
Powell: Fed reviewing ways to expand access to municipal facility
Powell also fielded questions from lawmakers on how he can ensure state and local governments get the assistance they require from the central bank during the pandemic.
Through its Municipal Liquidity Facility, the Fed will buy up to $500 billion in short-term municipal debt. The program is currently open to U.S. counties with at least 500,000 residents, cities with at least 250,000 residents, and U.S. states, which are expected to use the funds to help smaller local governments.
But Crapo noted that although Idaho will be eligible to participate, no local government in his home state is large enough to qualify for direct Fed loans. Boise — Idaho's capital and largest city — had nearly 229,000 residents in 2018, according to the U.S. Census Bureau.
The Fed has gradually expanded access to the municipal facility and will continue to "look at ways to accommodate further borrowers," Powell said. That includes cities and counties in states with fewer residents where only the state government is currently eligible to participate, he added.
Several lawmakers have pressed the Fed to take broader action to help state and local governments, which combined laid off nearly 1 million employees in April, according to Sen. Robert Menendez, D-N.J. Brown and Menendez, along with GOP senators Thom Tillis of North Carolina and Lisa Murkowski of Alaska, wrote a letter to the Fed and Treasury on May 14 asking them to set up a new facility to buy municipal bonds of longer maturities. The Fed's Municipal Liquidity Facility is currently only accepting muni debt with maturity dates of up to three years.
Powell said the Fed will consider that issue, but he declined to commit to any changes.
"What we're trying to do [with the lending facilities] is address liquidity needs," Powell said. "Those are really longer-term funding needs, but notwithstanding that, we are taking a look."