Top U.S. economic policymakers opened the door on Tuesday to further aid for small businesses hit by the coronavirus pandemic, but Federal Reserve Chair Jerome Powell said it probably should not be funneled through the central bank.
Stung by criticism that the Fed’s Main Street Lending Program had been ineffective in hitting small businesses, Powell told the House Financial Services Committee there was little demand for central bank loans of less than a million dollars.
If Congress wants to get smaller amounts of money to smaller businesses, it should use something like the Paycheck Protection Program adopted earlier in the pandemic, and spare the Fed the difficulty of underwriting loans to “hundreds of thousands” of small firms, Powell said in testimony to the Democratic-controlled committee.
“Trying to underwrite the credit of hundreds of thousands of small businesses would be very difficult,” Powell said.
PPP, which offered loans that would be converted to grants under certain conditions and did not involve strict underwriting of business applicants, “is a better way to approach that space,” he said.
Earlier in the same hearing, Treasury Secretary Steven Mnuchin said he was willing for the Fed to loosen the standards of the Main Street program and allow loans as small as $100,000, and that he expected it to suffer some loan defaults. The current loan minimum for the program is $250,000.
“We do expect to take losses and we are working closely with the Fed” to get more money flowing through the Main Street program, Mnuchin said. Of a potential $600 billion, the program has processed loans of about $2 billion since beginning in June.
But Mnuchin also said he was open to a further PPP-like program, or other follow-up efforts targeted at restaurants and small businesses in industries that have been particularly hard hit by the pandemic and benefited less from the first months of the economic recovery.
IMPROVEMENT AMID RISKS
Powell said the economy has shown “marked improvement” since the pandemic drove the country into recession. Still, the path ahead remains uncertain, and the trajectory of both the virus and fiscal policy pose particular risks.
Noting the rebound in jobs and household spending since the economy cratered in the spring and early summer, Powell said the United States still remains far from where it was, and “a full recovery is likely to come only when people are confident it is safe to reengage in a broad range of activities” with the coronavirus under control.
A stalemate in Congress over further aid programs, including the enhanced unemployment benefits that helped sustain household incomes since the spring, is adding to the uncertainty.
Congress passed the $2.3 trillion CARES Act aid package in late March as the foundation of the federal government’s economic response to the pandemic. It authorized the Treasury to fund an array of Fed lending and credit programs, including the Main Street program.
Lawmakers have been concerned there has been limited use of that program even as other Fed actions have ignited a stock market rally that helped investors recoup earlier losses. Meanwhile, joblessness remains elevated and roughly 29 million people are claiming some form of unemployment insurance on a week-to-week basis.
The state of the economy and the path of the pandemic are central issues in the Nov. 3 presidential election.
The pandemic dealt a death blow to the longest-ever U.S. economic expansion when widespread business shutdowns and stay-at-home orders triggered the largest drop in activity since at least World War Two. The Fed responded by cutting interest rates to near zero, ramping up bond purchases and launching nearly a dozen emergency credit facilities, several with Treasury’s backing.
Tuesday’s hearing, the first of three featuring Powell this week, was chaired by Democratic Representative Maxine Waters of California. On Wednesday, Powell is due to appear before a hearing of the House Select Subcommittee on the Coronavirus Crisis chaired by Democratic Representative James Clyburn of South Carolina.
On Thursday, Powell and Mnuchin will testify before a hearing of the Senate Banking Committee chaired by Republican Senator Mike Crapo of Idaho.
(Reporting by Dan Burns in Connecticut, Ann Saphir in Berkeley, Calif., and Andrea Shalal and Howard Schneider in Washington; Editing by Matthew Lewis and Paul Simao)
