The stimulus proposal announced on Tuesday attempts to strike a compromise between the more generous package sought by Democrats and the lower offer put forward by Republicans © Saul Loeb/AFP/Getty

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A bipartisan group of US senators has proposed a $908bn spending package to break the deadlock on fiscal stimulus as Jay Powell, the chairman of the Federal Reserve, made a new appeal for lawmakers to provide more government support to the economy.

The proposal, led by Mark Warner, the Virginia Democrat, and Susan Collins, the Maine Republican, reflects the growing anxiety in Washington over the state of the economy. Negotiations on a new stimulus package faltered before the November election and have not resumed.

At a hearing before the Senate banking committee on Tuesday, Mr Powell said the recovery had been “faster” than expected, but the labour market was still 10m jobs below pre-pandemic levels.

“We can both acknowledge the progress and also point out just how far we have left to go,” Mr Powell said, adding that the “lion’s share of the credit really should go to fiscal policy”.

“We’ll use our tools until the danger is well and truly passed, and it may require help from other parts of government as well, including Congress,” he added.

Later in the hearing, the Fed chairman said: “We can see the end, we just need to make sure we get there.”

Treasury secretary Steven Mnuchin, left, and Fed chairman Jay Powell testified before the Senate banking committee © Susan Walsh/Pool/Getty

The bipartisan Senate proposal announced on Tuesday would plough $288bn into small business aid, allocate $180bn to unemployment benefits and provide $160bn to state and local governments, among its more costly measures. It falls short of a stimulus package worth more than $2tn passed by Democrats in the House of Representatives in September, but is higher than the $500bn plan proposed by Senate Republicans around the same time.

“It would be stupidity on steroids if Congress left for Christmas without doing an interim package as a bridge,” Mr Warner told reporters on Tuesday.

It is unclear whether the bipartisan plan will be enough to deliver a breakthrough. Joe Biden, the US president-elect, called for a stimulus bill to be enacted before he takes office in January, as he presented senior members of his economic team on Tuesday. But he warned that this should not dampen momentum for his broader economic agenda once he takes office: “Any package passed in the lame duck session is likely to be at best just a start.” 

Mitch McConnell, the Republican Senate majority leader, privately circulated a new stimulus plan, according to The Washington Post, but at just over $300bn and failing to address key Democratic priorities, it was expected to be rejected. It was unclear whether Democrats had made a new offer to Republicans, and aides declined to provide any details.

Steven Mnuchin, the Treasury secretary, told the Senate banking committee on Tuesday that the Trump administration held out some hope for a deal. “We support targeted quick relief,” he said.

The hearing featuring Mr Powell and Mr Mnuchin comes on the heels of an unusual public split between the Fed and the Treasury department over the future of lending facilities set up at the start of the pandemic to stabilise financial markets.

While the Fed has pushed for them to be extended, the Treasury instructed the central bank to wind down several of them — including those backstopping corporate and municipal debt markets — and return unused funds to its coffers.

Column chart of Assets, $bn showing Steven Mnuchin requests end to four emergency Fed facilities

Mr Mnuchin defended the move, arguing that he was following Congress’s intent to end the programmes at the end of the year — which drew stinging attacks, particularly from Democratic senators.

“Other than using your final months in office to work for the people whom you have sworn to serve, you appear to be trying to sabotage our economy on the way out the door,” said Sherrod Brown of Ohio, the top Democrat on the panel.

Although there are serious concerns about the withdrawal of the Fed credit facilities, their mere existence has been more powerful than their actual use.

According to Financial Times calculations based on Fed data published last week, just $86bn of the central bank’s firepower is currently deployed. That is roughly 3 per cent of the minimum $2.6tn the central bank said it would make available, and a 20 per cent decline since July, when usage peaked at $107bn.

A bullet chart showing the Federal Reserve's usage of its emergency facilities

There has been little demand for the $750bn corporate credit facilities and the $500bn municipal lending facility, with the Fed extending less than $2bn of loans to just two public entities so far. Small businesses have also been hesitant to use the Main Street Lending Program, aimed at supporting small and medium-sized businesses. Just $5.8bn of its $600bn capacity has been lent out since its inception.

“The market will not weaken just because of the announcement. But say, just one high-profile municipal deal which witnesses weak demand will be enough to have a ripple effect and can fan investor fears — this in turn could cause volatility spikes,” said Vikram Rai, head of municipal strategy at Citigroup.

Additional reporting by Brooke Fox in New York

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