In a conversation with reporters on Thursday, Tommy said he was “hoping and hopeful” that the language would be included in a final settlement.
“This is the most important thing for me,” he said, about adding that the Fed is being “prevented from politicizing” and is pressurizing municipalities and companies to misuse it.
Tommy said, “This is not in any way an attempt to upset the Biden administration or weaken our economy.”
The provision takes some away from the Fed, as Joe Biden prepares to enter the White House and the economy is facing a new recession amid the revival of the coronovirus.
But Tommy said that only a handful of programs that are supported by the CARES Act money will be affected by the provision. “This is not a comprehensive rewrite of the Fed’s emergency powers,” he said.
Since the Great Depression, the central bank has gained authority in emergency situations to lend to any borrower to ensure the proper functioning of the financial markets.
The Fed expanded that authority during the 2008 financial crisis, which considered too big a gap in the economy to fail like AIG. Later, in the 2010 Dodd-Frank Act, Congress required the central bank to create a “broad-based” lending program for a subset of companies, rather than lending to only one firm. The Treasury Secretary is also required to sign any such program.
At the beginning of the epidemic, when the major debt markets began to freeze, the Fed employed a number of similar emergency programs in 2008, such as loans to companies ranging from bonded credit card debt to debt packages to highly indebted businesses. That program is designed to give more loans to consumers and businesses by increasing the demand for securities for those loans.
The Fed and the Treasury used CARES Act funds to cover any losses under that program. This means – under the sanctions advocated by Toomey – that the central bank would never open another similar program without congressional approval.
The central bank also would not be able to perform many of the tasks in this emergency, including municipal lending programs and “Main Street” trade lending programs, which were created at the behest of Congress.
And it would not be able to buy corporate bonds because it was wracked by an epidemic following economic shocks and the fear of a full-fledged credit crisis. The program has been the Fed’s most controversial during this crisis, but lawmakers, including Toomey, praised it for successfully restoring the order to allow companies to borrow cheaply without the need to turn over the government.
For its part, the Fed has said that it would like to keep emergency programs running until the crisis ends. Nevertheless, chairman Jerome Powell has said that he has accepted Treasury Secretary Steven Menuchin’s explanation that the program should end at the end of the year.
He avoided answering at a press conference on Wednesday whether he would accept a new interpretation from a new Treasury Secretary. He also declined to say whether the central bank had plans for future emergency programs.
“We will use whatever rights we have, if they are needed and if the law allows us to do so, we will use them,” said Pavel.