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Partisan Fight Over Fed Lending Programs Escalates -- Update

12/01/2020 | 01:45pm EST

By Nick Timiraos and Kate Davidson

The Treasury Department's decision last month not to renew a suite of emergency Federal Reserve lending programs touched off a partisan fight over whether and how the Biden administration should be allowed to use the programs.

Lawmakers pressed Treasury Secretary Steven Mnuchin over his decision at a hearing Tuesday with Fed Chairman Jerome Powell before the Senate Banking Committee. It was their first joint appearance since last month's decision, which drew a rare objection from the Fed.

The Fed and Treasury had mostly collaborated smoothly over providing emergency support to financial markets until Mr. Mnuchin said on Nov. 19 that he wouldn't extend the facilities because he believed he lacked the authority to do so, a legal opinion that isn't shared by the Fed. He also said that the programs were no longer needed and that around $430 billion in unused funds would be better spent on other assistance.

"My motivation was not political. It was purely legal," Mr. Mnuchin said. "If you want to extend this, bring back legislation that would authorize me to do it."

The Fed said it would prefer the lending programs remain in place until the risks posed to the economy by the coronavirus pandemic, which has led to a new surge of infections in the U.S. and globally in recent weeks, has subsided.

"Any central banker would tell you it's premature to be pulling back support for the economy," Mr. Powell said.

Democrats see the programs as a potential tool for the Biden administration to deliver more aid to hard-hit businesses, cities and states if Congress doesn't act to approve more spending. Sen. Sherrod Brown (D., Ohio) said to Mr. Mnuchin at Tuesday's hearing, "You appear to be trying to sabotage the economy on the way out the door."

Republicans have said they are worried about relying on the central bank to deliver relief as a substitute for spending decisions that should rest with Congress. "We want to avoid morphing these programs into a mission that was never the intended purpose," said Sen. Pat Toomey (R., Pa.) in an interview Monday.

The Treasury and Fed launched five programs in March and April supported by $195 billion that the Treasury provided to cover losses. Congress had approved $454 billion in such funding for Mr. Mnuchin to allocate to Fed lending programs in the Cares Act pandemic relief bill in March.

Stock markets rebounded in the days after the Fed and Treasury announced the programs and staged a rapid recovery in the following months.

Lawmakers in both parties accused the other of playing politics with the programs on Tuesday. Before last month's decision by the Treasury Department, Democratic lawmakers had been wary of the discretion the Cares Act gave to Mr. Mnuchin; several of them had referred to the $454 billion as a "slush fund."

But on Tuesday, Sen. Tom Cotton (R., Ark.) said it appeared that Democrats, in decrying Mr. Mnuchin's decision, "would like to have a $454 billion slush fund" for the Biden administration.

Sen. Robert Menendez (D., N.J.,) said it wasn't until after President Trump lost his re-election bid that Republican lawmakers and the Treasury Department indicated that Mr. Mnuchin lacked the authority to extend the lending programs

"Ending these facilities is not mandated by law," Mr. Menendez said.

Meanwhile, stalled negotiations over coronavirus relief showed signs of new life Tuesday, as a bipartisan group of lawmakers unveiled a compromise proposal for around $900 billion in new spending, seeking a middle ground between Democratic and Republican leaders' stances.

Mr. Powell has said more government spending will be needed to provide a stronger and broadly shared rebound. "We can see what may be the light at the end of the tunnel with the vaccines," he said. "Some fiscal support now would really help move the economy along as well."

While the economy has rebounded more strongly than the Fed and many private forecasters anticipated, Mr. Powell said the number of Americans who had been displaced from their jobs during the pandemic still exceeded the worst levels of joblessness from the 2008 financial crisis.

"We can both acknowledge the progress and point out just how far we have left to go," he said.

Write to Nick Timiraos at nick.timiraos@wsj.com and Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

12-01-20 1344ET

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