Senate Republicans have proposed scrapping $200bn in government funding for future emergency lending by the Federal Reserve, as part of a new economic stimulus package that congressional Democrats have already dismissed as insufficient.
If approved by Congress and the White House, the move to shrink the pot of money available for the Fed to provide credit to troubled parts of the economy could reduce Washington’s ability to mount a rapid response to a new downturn in financial markets.
The provision on Fed lending helped reduce the price tag on the $500bn fiscal package introduced by Mitch McConnell, the Kentucky Republican and Senate majority leader, on Tuesday. The legislation is intended to inject more money into US households and businesses impacted by the pandemic, with less than two months before the general election.
Mr McConnell said: “Republicans believe the many serious differences between our two parties should not stand in the way of agreeing where we can agree and making law that helps our nation.”
The Republican legislation, which has the Trump administration’s support, includes new money for federal unemployment benefits, replacing the $600-per-week payment that expired in late July with cheques worth half that — $300 per week.
It will not, however, include a new round of direct payments to individuals, after up to $1,200 was sent to many American adults in April and May — nor will it offer any federal aid to cash-strapped state and local governments, which was a key demand from congressional Democrats.
In a joint statement, Nancy Pelosi and Chuck Schumer, the top Democrats in Congress, said the Republican plan “doesn’t come close to addressing the problems and is headed nowhere”.
“This emaciated bill is only intended to help vulnerable Republican senators by giving them a ‘check the box’ vote to maintain the appearance that they’re not held hostage by their extreme rightwing that doesn’t want to spend a nickel to help people,” they added.
The reduction in the size of funds available for crisis lending by the Fed was among the biggest surprises in the legislation announced on Tuesday.
In March, as part of the original $2.2tn coronavirus stimulus legislation, lawmakers set aside $454bn for the US Treasury to invest in emergency credit facilities run by the Fed, which are designed to buy everything from risky corporate debt to municipal bonds and provide loans to struggling midsized businesses.
The display of overwhelming financial firepower from the government helped drive a big market rebound, although more than half of the funds have not been used.
The US Treasury has so far committed about $200bn to the Fed facilities, and only a portion of that has gone out into the economy in the form of central bank credit. That has prompted lawmakers and the Trump administration to search for ways to reallocate the money.
“We have $300bn ready to go, all Congress has to do is say, ‘Use it.’ I’d like to use it without their permission but I guess I’m not allowed,” Donald Trump, president, said last week, referring to the money for the Fed lending.
The US Treasury and Fed declined to comment on the measure.
Democratic leaders on Capitol Hill have proposed a much larger package worth $3tn. They have argued that the Republican plan would do very little to help an economy that is still 11m jobs short of pre-pandemic employment levels, with millions of Americans struggling to pay for essential needs including housing and food.
But Republicans’ unwillingness to offer any significant funding for state and local governments has generated outright anger among Democrats and remains the main sticking point on the path to a deal.
Amid big differences over the size and details of a new stimulus package, hopes that a compromise can be reached by the November election, which most economists have been counting on to support the US recovery, have gradually faded.
Policy analysts have also noted that the August jobs report, which showed an unexpected drop in the US unemployment rate from 10.2 per cent to 8.4 per cent, has removed some pressure on Republicans and the White House to consider a bigger stimulus package.
In a note to clients on Tuesday, Chris Krueger, an analyst at Cowen Washington Research Group, wrote that the stimulus talks were on “life support”.
On Monday, Mr Trump said he was taking the “high road” by not meeting congressional Democrats to hash out a deal. “I don’t need to meet with them to be turned down,” he said.
But Mark Meadows, the White House chief of staff, told Fox Business Network on Tuesday that he was more hopeful about reaching an agreement, saying Democrats would eventually bow to pressure from the public and embrace a smaller package.
“I do believe that we’ll see that only because . . . I’ve had a number of conversations, probably a dozen sometimes a day with different rank-and-file members and when you listen to them, they’re listening to their constituents,” Mr Meadows said. “I’m more optimistic perhaps today than I’ve been in a long time.”