Only two loans have been made: one to the State of Illinois and another to the Metropolitan Transportation Authority of New York for a total of $1.7 billion, which is 0.3 percent of the $500 billion Congress authorized for facilitating such loans in the CARES Act. And for the M.T.A., those loans remain inadequate, as New York City still plans to lay off subway workers and drastically cut service.
Mr. Powell has often sounded exasperated when pressed about the program this fall. He explains that private actors in the municipal bond markets are there to make the vast majority of loans, “so we,” the Fed, “only actually have to do a backstop,” which stabilizes the private rates being offered.
Then he sidesteps follow-ups, like those from Congresswoman Rashida Tlaib, which argue that those private loan terms are still seen as onerous by state and local leaders from Louisiana to California. If still pressed, he repeats, over and over, the limits of the Fed’s authority to make emergency loans (tucked under section 13(3) of the Federal Reserve Act).
This most recent news — that Secretary Mnuchin has not only been tamping down any consideration of the Fed using more boldly but now also plans to shut it down — has shown that Chairman Powell has a point. If you get into the weeds of the CARES Act, you’ll see that Congress instructed the Fed to work with the Treasury on the details of the emergency lending facilities and that the Treasury has the ultimate say.
No responsible economist wants the Fed to push past its legal authority. The last thing America needs now is another assault on our democratic institutions. But there is still much the Fed can do and prepare for in the meantime, even under pressure from the Treasury.
President-elect Biden’s pick for Treasury secretary will be much more likely to work with, not against, the Fed in more generously supporting state and local governments. Many of the prominent names being floated have already worked closely with Chairman Powell and expressed sympathy for a more aggressive use of recovery tools.
Even in his news release announcing closure of these crucial emergency programs, Secretary Mnuchin acknowledged that if “it becomes necessary in the future to reestablish any of these facilities, the Federal Reserve can request approval from the secretary of the Treasury.” Teams inside the Fed could be drawing up plans for an ambitious reboot of the facilities now.