Fed is acting through ‘lending powers’ – not ‘spending’ – chair asserts in remarks; calls for national plan to reopen economy

The Federal Reserve’s latest actions to pump up the economy in the face of the coronavirus crisis – including Thursday’s announcement of $2.3 trillion more made available by the central bank – are the result of the agency’s lending powers, and not spending authorities, the Fed Board chair said Thursday.

In other comments, he said a national plan was needed to reopen the economy. However, he said, the nation needs to avoid a “false start.” He said that’s where “we partially reopen the economy and that results in a spike in coronavirus cases, and they we have to go back to square one. We all want to avoid that.”

In remarks during a webinar sponsored by the Brookings Institution, a Washington think tank, Federal Reserve Board Chair Jerome H. (“Jay”) Powell acknowledged that the Fed is not authorized to grant money to particular beneficiaries. His remarks came on the same day that the Fed unveiled a new $600 billion facility (as part of the $2.3 trillion action) called the Main Street Lending Program (MSLP), designed to purchase loans to small- and mid-sized businesses made by financial institutions.

“The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid,” Powell said. “In the situation we face today, many borrowers will benefit from these programs, as will the overall economy. But there will also be entities of various kinds that need direct fiscal support rather than a loan they would struggle to repay.”

The Fed chair asserted that his agency’s emergency measures in the face of the crisis were reserved for truly rare circumstances, “such as those we face today.”

“When the economy is well on its way back to recovery, and private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth, we will put these emergency tools away,” he said.

Regarding the steep spike in unemployment (with unemployment insurance claims reaching more than 16 million this week – an all-time high), Powell suggested that unemployment will be “very high,” but will be temporary, as a result of the crisis.

Federal Reserve Board Chair Jerome H. Powell: COVID-19 and the Economy