The Fed and Treasury Testify Before Congress

September 25, 2020
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As mandated by the CARES Act passed by Congress in March, Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin participated in their quarterly exercise of appearing before the House Financial Services Committee Tuesday and the Senate Banking Committee Thursday. The pair faced difficult questions about their use of the approximate $2 trillion in CARES Act funds and how to support and accelerate the U.S. economic recovery.

The Federal Reserve and Treasury took strong steps in March and April to mitigate the most severe economic impacts of the COVID-19 lockdown recession. Yet many programs lapsed this summer for small business aid and bonus unemployment benefits.

Lending programs are proving less useful than the CARES Act intended. Treasury and the Fed have adjusted terms for key lending facilities, including the Main Street Lending Program. Under the plan, small- and medium-sized companies can borrow as much as $600 billion, backed by $75 billion of Treasury funds. Yet, as of September 16th, the amount advanced is under $2 billion. In other words, not a very successful stimulus program.

Significant uncertainty may be what’s keeping business owners uninterested in borrowing, and Mnuchin noted larger companies, which qualify to borrow under other provisions, may have already been able to get credit elsewhere and likely on more favorable terms. Meanwhile, firms in distress, many of which are smaller-sized businesses, either cannot qualify or are concerned about their ability to repay.

Fed Chair Powell reminded lawmakers of the constraints posed by the CARES Act and Federal Reserve Act. Fed-directed loans cannot be forgiven. Loans may not be the right solution in the current environment, and evidence suggests creditworthy borrowers can currently get loans from the private sector.

That thrusts attention back on the Paycheck Protection Program (“PPP”), which only Congress can extend. It stopped accepting applications in August, even with $134 billion in funds remaining. Businesses that received a PPP loan were not eligible to go back for a second round of funding.

Secretary Mnuchin made clear he is eager to reallocate funds initially appropriated under the CARES Act to serve as a loss buffer for the Main Street and other emergency programs. “We would like to spend that money on other areas of the economy that could be better served,” Mnuchin said. “Unfortunately, we do need Congressional authority to use it in other areas.” Mnuchin highlighted the extent to which new legislation would help to limit lasting damage as the economy recovers, consistent with the assertion often avowed by the Fed.

Chairman Powell’s good news, bad news

Across both Congressional testimonies, Powell stressed that the Fed will continue to use all the tools available to them, for as long as it takes, to make sure the recovery will be as strong as possible and to limit lasting damage, especially on the employment front.

He also noted that the economy has improved since its second-quarter shutdown and many economic indicators are showing “marked” improvement. Household spending has recovered three-quarters of its decline, likely due to the federal stimulus money and additional unemployment bonuses. The housing market and business investment (see section on “core capital goods” below) remain quite strong. Half of the 22 million jobs initially lost during the spring shutdown have been regained.

On the other hand, Powell also pointed out that economic activity and employment remain well below their pre-pandemic levels, and America’s economic future remains very uncertain. This historic downturn has not affected all people equally as those least able to bear the burdens of an economic crisis have been the most affected. Joblessness has fallen mostly on low wage laborers, women, African Americans, and Hispanics.

Powell sees full recovery possible only when people are confident that it safe to reengage in a broad range of activities still shunned, such as travel, leisure, and person-to-person services and activities. The path forward will depend on keeping the virus under control, an eventual effective vaccine, and policy actions taken by all levels of government, including Congress (wink-wink).

Next round of fiscal stimulus?

Prospects for another round of fiscal support have further dimmed amid partisan tension over the battle to replace Supreme Court Justice Ruth Bader Ginsburg, with under 40 days remaining before the U.S. election.

In Thursday’s Senate Banking Committee testimony, Mnuchin said he and Speaker of the House Nancy Pelosi agreed to resume talks on another economic relief package amid concerns that the recovery will soon sputter without additional fiscal support.

Yet the ability to reach a deal remains unclear. At the hearing, Mnuchin was critical of Democrats for making negotiations conditional on an agreement for a broad package that would cost more than $2 trillion and said he hoped that Republicans and Democrats could pass targeted legislation on the items where they at least agree.

Speaker Pelosi responded to reporters Thursday that she expected to return to the negotiating table with Secretary Mnuchin “hopefully soon.” She added that she was “talking with my caucus, my leadership, and we’ll see what we’re going to do, but we’re ready for a negotiation, that’s what we’re ready for.”

Regarding additional unemployment benefits and small business aid, Congress’s spending powers would be more effective to deal with the crisis than the Fed’s lending programs. While the initial stages of recovery have shown improvements in many indicators and sectors, a critical period for the economy lies ahead. Virus intensity remains elevated throughout the country and more activities will be moving indoors as we head into autumn and the flu season.

Due to the current lapse in fiscal relief, some economic projections reflect a significant slowdown in the final quarter of 2020 and the first-quarter of 2021. Without additional fiscal support, some projections call for a decline in fourth-quarter 2020 GDP growth by as much as 5% (annualized).

Deadline looming for airlines

A few senators pressed Powell and Mnuchin on how Congress might best redeploy unused funds it committed to capitalize lending facilities. Powell said the government’s continued support of the PPP for small businesses and additional benefits for the unemployed would have the most impact.

Mnuchin focused on the airlines in particular, stating that the aid provided to them “literally saved the entire industry”, adding that there is a concerted effort to find ways to extend payroll support to air carriers so that they can limit more layoffs. Unfortunately, there is no way for the Fed nor the Treasury to do that unilaterally.

The CARES Act provided $25 billion for the hard-hit airline industry to prop up payrolls. In return, air carriers were required not to cut jobs and to maintain minimum levels of service. But all that protection comes crashing down September 30th. Without further congressional action, tens of thousands of U.S. airline workers will lose their jobs on October 1st, despite a massive amount of lobbying by airline industry executives, trade groups, and unions. American Airlines has said it will furlough 19,000 workers on that date. United Airlines will lay off up to 16,000 employees. Delta Air Lines and Southwest Airlines have said they will avoid most forced cuts, for now, after tens of thousands of workers retired early or took leaves of varying length.

In response, there was some grumbling among senators that airlines should not be singled out for relief while restaurants and other travel and leisure businesses are suffering equally, or worse.

 Chicago Fed President hints at possible rate increases sooner than expected

The U.S. central bank’s new guidance on interest rates does not preclude tightening before inflation averages 2% for some period of time, Chicago Federal Reserve President Charles Evans said Tuesday while answering questions during a virtual event hosted by the Official Monetary and Financial Institutions Forum.

“We’ve sort of said we’re looking to get inflation up to 2%, and then after that, we could be raising rates and still have an accommodative setting of monetary policy,” Evans said. He went on to state that “we could start raising rates before we start averaging 2%. It’s still possible, we need to discuss that.”

Evans’s comments were directed at questions left unresolved by the guidance Chairman Powell and his Fed colleagues issued last week at the conclusion of their latest policy meeting.

The updated guidance took into account an earlier Fed announcement in August that it would begin to interpret its 2% inflation target as a goal to achieve on “average” and “over time”. The Chicago Fed chief said additional decisions to be made on how that will relate to the timing of an eventual rate hike will need to be examined.

But what about the potential for another round of $1 to $2 trillion in fiscal stimulus? Fed projections generally do not incorporate fiscal policy changes until they become law. Central bank watchers could make some big adjustments to their expectations depending on pending legislation, or continued gridlock, as well as progress on a COVID-19 vaccine. Either could prompt a change in projected and actual inflation and interest rate increases over the near horizon.

Value of core capital goods orders rises to two-year high

Bookings for durable goods, or items meant to last at least three years, increased a less than expected 0.4% in August from the prior month, after an upwardly revised 11.7% jump in July, Commerce Department data showed Friday. The median survey of economists called for a 1.5% gain. U.S. orders for durable goods increased at a slower than anticipated pace primarily due to declines in bookings for new motor vehicles and military equipment.

However, core capital goods orders, a category that excludes aircraft and military hardware and is seen as a barometer of business investment, rose 1.8% for the month to its highest level since 2018, after an upwardly revised 2.5% gain in July:

As it has been seen with consumer spending, business outlays for equipment have rebounded faster than most expected from when the lockdowns began. These new figures suggest that the manufacturing sector continues to rebound from its pandemic lows as companies replenish inventories, though the pace of orders growth is decelerating.

In addition to the labor related concerns discussed above, the airline industry also serves as an example here, as it remains extremely depressed as the pandemic stretches on. Orders for civilian aircraft and parts were negative, continuing to reflect ongoing cancellations. Boeing reported eight orders in August, up from zero in July. The company has received hundreds of cancellations this year, weighing on total U.S. factory output.

Initial weekly jobless claims disappoint by rising

Initial weekly jobless claims, one of the most anticipated data points in the current economic climate, missed expectations and moved up for the week ending September 19th. The Labor Department reported Thursday that initial jobless claims for the past week came in at 870,000, adjusted for seasonal fluctuations. The median estimate from economists expected first-time claims to fall to 840,000, down slightly from the previous week’s revised 866,000 claims.

Continuing jobless claims, which include those receiving unemployment benefits for at least two straight weeks, decreased by 167,000 to 12.58 million during the week ending September 12th. Continuing claims data is delayed by one week and is considered more of a bellwether of permanent unemployment pending in the economy.

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