Should the Fed lend directly to businesses?

Some senior senators want the US central bank to make broader use of its powers to help business: Reuters sources

Coronavirus Economy
A person peers through the blinds from inside the Life Care Center linked to several confirmed coronavirus cases in US, where many businesses are hurting because of the impact of the virus [File:Karen Ducey/Reuters]

The pressure is growing in Washington for the United States Federal Reserve to use its emergency powers to lend directly to businesses hurt by the coronavirus, four people with knowledge of the discussions told Reuters News Agency.

The US Treasury, senior bankers, the US Chamber of Commerce, and some senior senators want the central bank to make broader use of its powers under Section 13(3) of the Federal Reserve Act to provide credit directly to businesses under “unusual and exigent” circumstances, the sources said.

On Tuesday, the Fed used that authority to resurrect a pair of 2008 financial crisis-era programmes aimed at boosting liquidity for the two dozen banks that transact directly with the Fed and to unclog a short-term funding market essential to large corporations.

But those programmes do not get funds directly to small businesses, a linchpin of the US economy. Bolstering this sector is seen as critical at a time that measures taken to contain the virus outbreak have started forcing closures of enterprises ranging from corner bodegas and restaurants to fashion boutiques and health spas.

Policymakers are wrestling with unprecedented issues, including which type of businesses the Fed could lend to and at what rate, what collateral the Fed would need in return, what extra conditions it should impose on the loans, and how the Treasury would backstop the risk.

Any such plan would have to be approved by the Treasury, which would also have to guarantee the loans because the Fed is not allowed to take on such large credit risk. Both the sources told Reuters the Treasury had indicated a willingness to do so.

Aspects of such a facility may also require approval from Congress, and some legislators may be reluctant to hand so much power to the Fed, an independent agency.

The Fed and the US Treasury declined to comment on Wednesday. In recent interviews, Treasury Secretary Steven Mnuchin has said he wants to see the Fed’s powers expanded by Congress after they were curtailed following the financial crisis.

“Everyone is very much aware that we’re going down this road, and we need to put these things in place quickly,” said one industry source who has been discussing the matter with administration officials and legislators.

In a news conference on Sunday night after the Fed slashed interest rates to near zero and announced new bond purchases, Fed chair Jerome Powell said he felt the central bank’s existing authority was adequate, and asking Congress for new powers “is not something we’re actively considering right now … I think we do have plenty of space to adjust our policy.”

A second person with knowledge of the TBAC discussions told Reuters the Fed is reluctant to become a direct lender to large portions of the economy, preferring to focus on providing liquidity to the financial system and leave fiscal stimulus measures to Congress instead.

A third person familiar with the private discussions said members of the Treasury Borrowing Advisory Committee (TBAC), which regularly talks with the administration on market issues, have discussed ways in which the Fed can use its emergency power to support smaller businesses in phone calls over the past week.

Some TBAC members are concerned that securing needed approvals could take weeks, while measures are required immediately to support the economy, the second source said. But the second industry source said he believed there was already enough momentum on Capitol Hill for measures to be approved in days, adding that Congress had been able to move swiftly to adopt fiscal measures after the terrorist attacks of 9/11.

“It’s tough to see where the fault lines lie but people understand action needs to be taken and need to be taken quickly,” he said.

A spokeswoman for Democratic Senator Mark Warner, who is also on the Senate Banking Committee, said his office is working on legislative language that would give the Fed authority to lend to small businesses so as part of a one-trillion-dollar draft Congressional stimulus package, although it was unclear how much bipartisan support there would be for the provision.

A spokeswoman for Senator Mike Crapo, who leads the Senate Banking Committee, did not immediately respond to a request for comment.

With liquidity rapidly drying up in short-term funding markets, the Fed has taken a host of measures during the past week to ease the strain, including urging banks to use its discount window and providing cash through the commercial paper markets.

Those interventions lead the US markets to briefly rebound 6 percent on Tuesday, but with markets falling 8 percent again on Wednesday, investors, bankers, and lobbyists said the Fed might need to take further steps to ease liquidity strain.

Source: Al Jazeera