Steven Mnuchin has said the US Treasury was “fully prepared to take losses” on up to $500bn it set aside for loans to struggling businesses delivered through the Federal Reserve, as US economic policymakers faced pressure to ramp up the use of stimulus funds to help the economy.
“I know there’s been a lot of questions as to whether the Treasury is willing to take risk . . . I will say the answer is absolutely yes,” Mr Mnuchin, who has served as Treasury secretary since the beginning of Donald Trump’s presidency, told the Senate banking committee in a hearing on Tuesday. “We are fully prepared to take losses in certain scenarios,” he added.
The $500bn in rescue funds for corporate America is one of the pillars of the $2.2tn stimulus package passed by Congress in March to help the US economy weather the coronavirus pandemic. But two months later, Mr Mnuchin said only about half of the money had been allocated as equity to a series of loan facilities run by the Fed, which have only recently started or are yet to be launched.
A $600bn Fed loan programme designed specifically to help “Main Street” midsized businesses, with $75bn in Treasury equity, is expected to be up and running by the end of the month. It has already come under criticism for excessively restrictive eligibility criteria.
“I am gravely concerned that we need to get that out and we need to be very aggressive with it,” Mark Warner, the Democratic senator from Virginia, told Mr Mnuchin, who was testifying alongside Jay Powell, the chair of the Federal Reserve.
The US Treasury secretary said US policymakers were working to “let more and more companies into” the Main Street lending plan, and the base case was that “some losses” would be borne by taxpayers.
“There’s scenarios within Main Street where we could lose all of our capital, and we’re prepared to do that. There’s scenarios where the world gets better, and we could actually make a small amount of money,” he said.
The toughest questioning for Mr Mnuchin and Mr Powell came from Democratic lawmakers, who pressed the leaders of the US Treasury and Fed to accept the need for additional fiscal stimulus, They are particularly focused on help for state and local governments, which Republicans and some in the Trump administration are resisting.
Mr Powell has been vocal about the need for additional fiscal stimulus if warranted, but repeatedly stopped short of asking Congress for any specific measures or signalling any timeline for action — saying it was not his role, and that he wanted to “stick to our knitting”.
“I think we’re going to see here fairly quickly how the reopening goes, and it’s very hard to know. I think we are going to be getting a lot of information fairly quickly here, in terms of what may be needed,” he said. “What Congress has done to date has been remarkably timely and forceful . . . I do think we need to step back and ask, over time, is it enough?”
Mr Mnuchin said he expected the US economy to recover in the second half of the year, but warned that the data would get worse in the coming weeks before conditions started improving. He also cautioned that the economy risked “permanent damage” if lockdowns and stay-at-home orders imposed to contain the virus were not lifted.
Democrats on Capitol Hill also clashed with Mr Mnuchin and Mr Powell for favouring large companies and investors in the economic response to the crisis, which has sent the US unemployment rate soaring to 14.7 per cent while losses in financial markets have been more limited.
“From what we know so far, it does not appear that this administration or the Federal Reserve are making workers their priority,” Sherrod Brown, the top Democrat on the panel said.
“Today I look forward to hearing . . . not about what you’re doing for big banks or big corporations and how you expect that money to trickle down, but how you’re making sure the money and authority Congress gave you actually help the people who make this country work.”
Elizabeth Warren, the senator from Massachusetts and former presidential candidate, pressed Mr Mnuchin on the reasons why loans to US businesses in the stimulus bill did not contain firm guarantees that recipients would keep workers on payroll.
In his opening remarks Mr Powell said the Fed’s response to the crisis — which included slashing its main interest rates to zero, boosting asset purchases, and establishing crisis-era facilities to lend money across the economy — was “guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote stability of the financial system”.
Mr Powell added: “We are committed to using our full range of tools to support the economy in this challenging time even as we recognise that these actions are only a part of a broader public-sector response.”