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Much of the work on Biden’s behalf will fall to Janet Yellen, his choice to be Secretary of the Treasury. The former Fed President will bring her in-depth knowledge of the central bank’s toolbox, resulting from her long experience in the Fed system, to join forces with her former Fed colleague, the current president Jerome Powell.
The most direct way for the Fed to increase aid to the economy is to put in place two temporary loan programs designed to help midsize businesses and city governments – two of the programs Mnuchin is shutting down. at the end of the year. Although Yellen, if confirmed, could at least partially reopen them, the terms of the CARES Act – the massive spending program approved by Congress at the start of the pandemic in March – potentially limit the secretary’s power to send. more funds to cover the losses of the Fed loans after the end of the year.
The two programs only distributed a small portion of their available funds, in part because the Fed and the Treasury Department designed them so that the government wouldn’t waste a lot of money on loans. Yellen could also increase this risk appetite. But Mnuchin has now taken steps to drastically reduce the pot of money that will be available to lend, arguing the programs were no longer needed, prompting a backlash from Biden’s camp.
“The Treasury Department’s attempt to prematurely end support that could be used for small businesses across the country when faced with the prospect of further closures is deeply irresponsible,” Biden spokeswoman said, Kate Bedingfield, in a statement. “At this fragile time, as COVID and economic crises accelerate again, we should strengthen the government’s capacity to respond and support the economy – not undermine it.
Mnuchin, for his part, defended the move as adhering to Congress’ intention that the programs cease making new loans at the end of the year, a legal interpretation that is disputed.
“It’s not a political issue,” he told CNBC.
This will make things more difficult for Biden, although all the central bank can really offer vulnerable industries is lower cost debt support – a bridge to the other side of the crisis, rather than a long term solution. Republicans will likely block his most ambitious spending plans, as they did with President Barack Obama in the years following the 2008 financial crisis.
Biden’s problems will be compounded by the scheduled expiration of millions of Americans’ unemployment benefits at the end of the year, many of whom were spared eviction by a moratorium imposed by the Centers for Disease Control and Prevention which runs out at the same time.
“It’s just frustrating that [Congress] couldn’t do it, ”said Sheila Bair, who led the FDIC during the 2008 crisis, of another round of economic aid. “The Fed has been heroic in these interventions, but monetary policy is just not a good mechanism to channel money to households.”
Seth Carpenter, chief US economist at UBS, said: “Before Covid, central bankers were saying, ‘We want more fiscal policy. We are growing but it is slow. It was before Covid. Then you had the worst shock anyone has seen, so it looks like it can only strengthen that pre-Covid perspective. Central bankers were already saying that monetary policy cannot do it all on its own. “
“It must help what they are doing, but it just takes years to get back” to where we were, he added.
In the meantime, the central bank will do what it can. Markets will be watching to see if the Fed steps up its bond purchases further to help keep long-term borrowing costs low, to encourage companies to make longer-term investments.
The administration itself is limited in what it can do without more expense from Congress. There aren’t many immediate options for Biden’s team to further help the economy without more Congressional funding, beyond temporary relief like tax deferrals or structural changes to more. small scale that will only be useful in the long run.
But Yellen, if confirmed, could help boost the confidence of companies worried about how they will be treated and uncertain about new regulations, said Karen Dynan, professor of economics at Harvard University.
“You don’t want companies to get stuck where they are by not wanting to expand or rehire workers or make investments because they don’t know what’s going on down the road to Washington,” Dynan said.
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