By Howard Schneider
WASHINGTON (Reuters) – The U.S. Congress is considering authorizing the Federal Reserve to pay the tab as local governments ramp up shipments of testing equipment, masks and ventilators desperately needed to diagnose coronavirus cases, treat patients and keep medical personnel safe.
Emergency legislation pending in Congress would use the Fed’s financial might to bankroll state and local government efforts to fight the pandemic, a dramatic expansion of the central bank’s role in responding to the health crisis.
The legislation proposed by House Democratic leaders would change the Federal Reserve Act to have the Fed buy local government bonds and securities used to purchase medical equipment, broaden testing, quarantine patients, and sustain “the maintenance and delivery of basic public services.”
The 1400-page bill would compel the central bank to quickly establish procedures to buy state and local bonds needed to fund the crisis response in stricken areas, and charge what would currently be near 0% interest.
The number of cases has skyrocketed, overwhelming local medical systems. The equipment and testing shortage has threatened to postpone the day when the U.S. economy can safely reopen.
Under the legislation the Fed within a week of enactment would “establish a facility to buy and sell, at home or abroad, bills, notes, bonds and warrants…in order to fund a public health or public service response to the COVID-19 pandemic.”
The House bill, subject of negotiations underway between lawmakers and the Trump administration, would broaden the Fed’s role in other ways not included in companion Senate legislation. The House draft has 29 separate references to the Fed, while the bill originally proposed by Senate Republican leaders had none.
The house bill would require the central bank to cover losses of financial institutions asked to suspend loan repayments for households and small businesses, and to ensure mortgage servicers can continue payments to holders of mortgage backed securities, as well as of property taxes and insurance.
Those obligations signal lawmakers’ interest in bringing the power of the Fed’s theoretically unlimited balance sheet to bear on the crisis. They would supplement the historic efforts already announced by the Fed to ensure corporations and local governments can maintain funding through a crisis that has shut down large portions of the economy.
A separate program for “Main Street” businesses has been announced, but the details and level of funding will depend on what congress finally adopts.
Under the House version the Fed is to establish a credit facility for “small businesses,” but also has broad power to define that as any group of businesses where assistance “would promote full employment and price stability.”
House Speaker Nancy Pelosi raised the issue of help for local governments in a phone call with Fed chairman Jerome Powell, and other lawmakers have also pressed him on the issue.
The Fed did not respond to a request for comment about the House legislation. Though the central bank opened groundbreaking new programs this week in response to the crisis, Powell in a press conference this month said he did not feel the central bank needed the sort of broad authority the House legislation includes.
(Reporting by Howard Schneider; Editing by Dan Burns and David Gregorio)