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Fed’s Powell warns Congress to not let up on COVID-19 relief

Not the time to worry about long run fiscal situation

House Financial Services ranking member Patrick McHenry, R-N.C., told Powell the Fed isn't responsible for fiscal policy.
House Financial Services ranking member Patrick McHenry, R-N.C., told Powell the Fed isn't responsible for fiscal policy. (Bill Clark/CQ Roll Call)

Federal Reserve Chairman Jerome Powell continued Wednesday to warn lawmakers that the economic recovery could stall if emergency fiscal measures end too soon.

“It would be a concern if Congress were to pull back from the support that it is providing too quickly,” Powell testified before the House Financial Services Committee.

“I wouldn’t presume to prescribe exactly what you should — or should not — do, but I would say that it would be wise to look at ways to continue to support both to people who are out of work, and also smaller businesses that may not have vast resources for a continued period of time — not forever but for a period of time — so that we can get through this critical phase,” he added. “The economy is just now beginning to recover. It’s a critical phase and I think that support would be well placed at this time.”

Powell made similar remarks before the Senate Banking Committee Tuesday. In addition to encouraging Congress to continue to support unemployed workers and small businesses, Powell also laid out the severe economic consequences of not bailing out states and localities.

Most Republicans in Congress have been hesitant to endorse further fiscal steps, saying they prefer to wait and see how the economy responds to the emergency packages enacted since the pandemic hit.

But a few have called for additional steps.

Sen. Bill Cassidy, R-La., is co-sponsoring a bill that would give states and localities $500 billion more. Treasury Secretary Steven Mnuchin has also said the economy needs more COVID-19 aid from Congress. House Financial Services ranking member Patrick T. McHenry, R-N.C., appeared to join them Wednesday.

McHenry thanked Powell for his “encouragement,” on fiscal policy. “Additional congressional action is required,” McHenry agreed.

McHenry admonished Powell not to weaken the lending standards at the Fed facilities so much as to blur the line between monetary policy — the Fed’s setting of interest rates, buying assets and using emergency lending powers — and fiscal policy — government spending that can directly impact aggregate demand.

“The Fed is a lender of last resort,” he said. “It is not responsible for fiscal policy. That’s Congress’ action, and it is not a piggy bank to be used to fund the whims of Congress.”

Rep. Frank D. Lucas, a senior Republicanrom Oklahoma, called the extraordinary measures Congress and the Fed have taken to stabilize the coronavirus-wracked economy “dramatically cheaper than a lack of action.”

“Putting the economic train back on the tracks costs a lot more than keeping it on the tracks,” Lucas asked. “We’ll have to pay the piper eventually. But having that bill to pay is how we get to the point of being able to pay.”

“That’s right,” Powell responded. “That’s why I think this is not a time to worry too much about the longer run fiscal situation. We’ll have to return to that, but I would say this isn’t the time to prioritize that.”

Powell also said concerns that the collateralized loan obligation market will trigger a financial crisis, as mortgage-backed securities devastated Wall Street in 2008, are misplaced.

CLOs are bundles of leveraged loans — high risk lending to highly indebted companies and with weak lender protections — that are securitized and sold to investors, but often sit on banks’ balance sheets.

Powell said the fears of a wave of bankruptcies triggering another financial crisis were misplaced. “I don’t think that’s an appropriate comparison. I really don’t,” he said.

During the 2008 financial crisis, regulators had no idea how exposed banks were to the mortgage-backed securities market, which was further obfuscated by the widespread use of collateralized debt obligations and credit default swaps pegged to mortgage securities.

“That’s not the case with CLOs,” Powell said. “We have really good information, we include them on balance sheets, we include them in our stress tests.”

“It’s not to say there won’t be losses — there will be losses,” he added. “This is a severe downturn, but it is one that we have been monitoring carefully and that the banks are well capitalized to deal with.”

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