A political battle looms over the Fed’s emergency lending programs

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The success of the Federal Reserve’s emergency loan programs to stabilize financial markets is fueling a political battle over whether the programs should be extended.

Divisions over their future are magnified by the partisan deadlock in Congress over whether to provide more economic stimulus. Democrats, ahead of President-elect Joe Biden’s inauguration in January, see the programs as a potential tool to provide more aid if Congress does not act, while some Republicans fear relying on them. central bank lending powers as a proxy for congressional spending. the decisions.

The fight could open a wedge between the Fed and the Treasury Department, which have mainly worked together smoothly this year to provide emergency aid after the coronavirus pandemic rocked Wall Street. The Treasury launched the programs with the central bank in March and April after the unrest threatened to freeze credit flows to small businesses, large corporations, cities and states.

Stock markets rebounded in the days following the announcements of the programs and recovered rapidly in the following months.

A decision not to renew the programs risks disrupting markets by weakening a key source of insurance that has fueled investor optimism, said Roberto Perli, a former Fed economist who is now an analyst at Cornerstone Macro. They could also deny some businesses and governments access to low-cost credit if market conditions deteriorate.

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