By Nick Timiraos
The Federal Reserve quickly deployed a half-dozen emergency
lending programs over the past two weeks to ensure cash keeps
coursing through the U.S. financial system. Now, Congress wants it
to go much further, approving $454 billion to reload the Fed's own
ability to lend.
Washington is relying on the Fed, to an unprecedented degree in
peacetime, to preserve business balance sheets after elected
officials and private industry have put the economy into the
equivalent of a medically induced coma to stop the spread of the
coronavirus pandemic.
The economic-rescue legislation President Trump signed on Friday
asks the Fed to charge headlong into credit and fiscal policy, by
financing businesses, states and cities. These are areas the
central bank has normally regarded as matters best left to elected
officials in Congress and the White House.
"Congress is the Fed's boss and Congress has mandated them to
lend to areas of the economy that they were previously
uncomfortable doing," said Julia Coronado, a former Fed economist
and founder of economic-advisory firm MacroPolicy Perspectives.
The Fed has essentially unlimited power to lend during a crisis
so long as officials consider their loans well-secured. By
providing the Treasury Department with a sizable pot of money,
Congress has given the central bank more flexibility to ramp up
lending because the Treasury will agree to absorb initial
losses.
"This is an opportunity to leverage the unlimited balance sheet
of the Fed," Sen. Pat Toomey (R., Pa.) told reporters last week.
"It's totally unprecedented. We're hoping that it's a mechanism to
keep business alive."
The move to entrust the Fed with more responsibility marks an
about-face for both Congress and Mr. Trump, who has unsparingly
criticized the central bank and the man he picked to lead it,
Jerome Powell, for keeping rates too high. Ten years ago, Congress
curbed the very emergency-lending authorities lawmakers are now
asking the Fed to use, after popular outrage over how the central
bank exercised those powers following the failures of Bear Stearns
Cos. and American International Group Inc. in 2008.
The Fed's longstanding reluctance to coordinate with fiscal
policy dates to an accord with the Treasury Department in 1951. It
was reached after the Fed overrode the Truman administration's
demands to maintain pegs that had fixed yields on Treasury
securities to support the economy during and after World War
II.
"There is a long history of coordination between the Fed, the
administration, and Congress ending in a bad place," said Claudia
Sahm, a former Fed economist now at the Washington Center for
Equitable Growth, a liberal think tank. "That shows how severe the
situation is."
Mr. Powell, a lawyer who worked in the Treasury Department
during the George H.W. Bush administration, has worked diligently
during his two years as Fed chairman to meet regularly with scores
of lawmakers on both sides of the aisle.
By outsourcing more of the crisis response to the Fed, lawmakers
are signaling both a vote of confidence in the central bank while
potentially shielding themselves from blame for the difficult
decisions that lie ahead, said Mark Spindel, a Washington-based
investment manager who co-wrote a book on the Fed's historical
relationship with the White House and Congress.
"To Jay's credit, he has worked extensively to forge that
connective tissue with Congress, so the individual and the
institution are seen as objective; in the best sense, technocratic;
and independent of the hyper-partisanship" in Washington, said Mr.
Spindel.
The Fed's initial response borrowed from the programs developed
by former Fed Chairman Ben Bernanke, who during the 2008 financial
crisis broke the seal on lending authorities the Fed hadn't
employed since Great Depression.
Having exhausted those off-the-shelf tools, Mr. Powell must now
devise new ones, relying on the advice of British journalist Walter
Bagehot, author of an 1873 book that central bankers still use as a
guide for crisis management.
"The holders of the cash reserve must be ready not only to keep
it for their own liabilities, but to advance it most freely for the
liabilities of others," Bagehot wrote. "They must lend to
merchants, to minor bankers, to 'this man and that man,' whenever
the security is good."
The Fed can't lend directly to companies but, with the approval
of the Treasury secretary, it can create special facilities that
extend credit. The Treasury has already kicked in $10 billion for
each of five facilities, including two that will support markets
for large firms' debt.
The new Treasury infusions are likely to support another
facility the Fed has said it will create to loan to potentially
thousands of midsize businesses, likely through the banks that can
borrow directly from the Fed -- a massive operational enterprise
unlike anything the central bank has done.
The central bank is also looking into ways to prevent higher
borrowing costs from exacerbating strains for state and local
treasuries.
The real-estate industry, meanwhile, is lobbying the Fed to
extend loans to thinly capitalized nonbank mortgage companies that
will face distress if loan delinquencies rise. Those firms must pay
investors in mortgage bonds even if borrowers fall behind on their
payments. Any failure among nonbank mortgage firms could interfere
with substantial efforts to keep mortgage rates low.
"Many places in the capital markets, which support borrowing by
households and businesses -- I'm talking about mortgages and car
loans and things like that -- have just stopped working," said Mr.
Powell in a rare television interview last week.
"So we can step in and replace that lending under our emergency
lending powers," Mr. Powell said. "We will do that."
As these facilities are launched, officials are likely to face
tricky questions about how much further to intervene in credit
markets that remain in rotten shape, especially now that they will
have more funds available to take losses. Existing facilities have
limited lending to the highest-rated borrowers.
"Given they are constrained by how much protection they're going
to get from the Treasury, the fundamental logic of limiting
yourself to higher-quality assets but being able to do more is the
right trade-off," said Lewis Alexander, chief U.S. economist at
Nomura Securities.
"Every step you take into the riskier realm, the less you can
do," Mr. Alexander said. "They have to make a choice about
that."
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
March 29, 2020 12:26 ET (16:26 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.