Relief, but concerns

Given the U.S. economy’s pressing need for federal support, Congress must pass a relief bill before adjourning, even if the legislation that emerges from the proverbial sausage factory is not optimal. Given the latest ideas under discussion, it seems that the bill may be far from optimal indeed.

Republicans led by Sen. Patrick Toomey of Pennsylvania injected a proposal to curtail the Federal Reserve’s “lender of last resort” powers under a statute known as Section 13(3). The Fed drew on this emergency authority to devise broad new credit programs when the 2008 Great Recession hit, and again in March at the onset of the pandemic.

In the latter case, the Fed did so with express congressional support in the form of $454 billion in capital from the CARES Act. This intervention effectively shored up credit markets—so much so that most of the $454 billion remained uncommitted as of last month and, in part due to Toomey’s insistence, has gone back to the treasury for use in the very stimulus bill currently under discussion.

Not satisfied with that, however, Toomey wants to prohibit the Fed from again using its Section 13(3) powers to create programs such as the ones it established with CARES Act funds in 2020. Toomey says his goal is not to hamstring the Biden administration—as Democrats charge— but to prevent the central bank from end-running Congress’s control of fiscal policy.

The Fed could, in theory, abuse Section 13(3), though it hardly appears to have done that this year; its most aggressive foray into direct subsidy of private business, the Main Street Lending Program, supported only a tiny fraction of its $600 billion budget and ends Dec. 31.

Given all the uncertainties surrounding the country’s economic needs, it would be unwise to truncate the Fed’s powers.