Stocks fall after Fed and Treasury chiefs testify: May 19, 2020

By CNN Business

Updated 4:35 p.m. ET, May 19, 2020
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12:03 p.m. ET, May 19, 2020

Powell defends the Fed's corporate bond buying

From CNN Business' Anneken Tappe

Federal Reserve Chairman Jerome Powell defended the central banks' program to buy junk bonds during his testimony before the Senate Banking Committee.

He flagged that the Fed allowed for buying bonds from so-called "fallen angels" -- companies that have been recently downgraded from investment grade to junk -- to ensure there is "no cliff" between the two lending markets, Powell said.

"We're not buying junk bonds generally across the board at all," he added. "We maybe have to lend money to these companies, but even better, they can borrow themselves now."

12:03 p.m. ET, May 19, 2020

The Fed's municipal facility is 2 weeks from being operational, Powell says

From CNN Business' Anneken Tappe

Federal Reserve Chairman Jerome Powell said the central bank's new Municipal Lending Facility is about two week's away from being operational.

The program is designed to lend up to $500 billion in loans and $35 billion in credit protection to help states and local governments through the coronavirus recession.

3:27 p.m. ET, May 19, 2020

'We may have to do more'

From CNN Business' David Goldman

Wall Street just got the six words it was waiting to hear from Federal Reserve Chairman Jerome Powell: "We may have to do more."

Stocks rallied Monday after Powell told CBS' "60 Minutes" that the Fed would continue to act to stimulate the economy if it needed to. Again, today, Powell reiterated that the Federal Reserve will take more action if the economy isn't rebounding as well as it would like.

"We have to take a step ask, 'Is it enough?' and we need to be prepared to act further, and we are if the need is there," Powell testified before the Senate Banking Committee.

Powell said further Fed action will depends on the path of the economy, how the reopening goes and "which path we finds ourselves on."

2:55 p.m. ET, May 19, 2020

Elizabeth Warren wants big businesses that get government loans to keep their workers. Steven Mnuchin won't commit

From CNN Business' David Goldman

Senate Banking Committee
Senate Banking Committee

Senator Elizabeth Warren wants to know why some businesses that are getting federal funding are not required to keep their workers employed.

Congress gave Treasury the authority to dole out $500 billion to shore up mid-sized and large corporations. But unlike the Payroll Protection Program and other small-business lending facilities, which forgive loans when businesses keep employees on their payroll, Treasury did not stipulate anything about big businesses having to do the same.

Elizabeth Warren was displeased, to say the least.

"You're boosting your Wall Street buddies, and you are leaving the American people behind," she said. "You were given the authority to determine the terms ... and those term sheets do not require that a single corporation getting millions of dollars in taxpayer money retain one job."

Mnuchin called that a "very unfair characterization" and noted "different facilities have different requirements." Warren argued Mnuchin has the "specific authority" to determine the terms of the loans for mid-sized and big corporations.

Although Mnuchin said the Trump administration's No. 1 priority is keeping people working -- and he noted certain restrictions on employee compensation, dividends and buybacks for companies receiving loans -- he wouldn't commit to any specific payroll protections associated with big-business loans.

"We expect people to use their best efforts to support jobs," Mnuchin said.

Warren noted that's far from a requirement.

11:39 a.m. ET, May 19, 2020

Powell: Don't worry about the Fed's balance sheet. It will shrink in time

From CNN Business' Anneken Tappe

The Federal Reserve's balance sheet is ballooning at the moment because the central bank is buying up lots of securities to support the economy.

But Fed Chairman Powell isn't too concerned about that.

"I would expect that over time [...] the assets that we have on our balance sheet from this era will mature and roll off," Powell said during today's Senate Banking Committee hearing.

The shrinking of the balance sheet will be gradual, and "it will be some years down the road," he added.

What matters more, Powell noted, is the size of the balance sheet relative to the economy. And in the meantime, the enlarged balance sheet doesn't raise concerns about inflation or financial stability, he said.

3:32 p.m. ET, May 19, 2020

No one wants to hang onto American debt for 50 years

From CNN Business' David Goldman

Remember all that talk about Treasury issuing 50-year bonds? Treasury Secretary Steven Mnuchin had floated the idea as a way to find lenders to support American's mounting debt pile, which supports massive economic bailouts, tax cuts, health care, safety nets and other programs.

Well, Mnuchin said demand just doesn't exist for 50-year bonds. Here's the good news: Investors can't get enough of America's shorter-term debt. Interest rates are super low because people keep buying bonds like they're panic-shopping at Walmart.

And Treasury is still thinking about medium-term bonds, including 20-year Treasuries. People are still fearful about the long-term future, but compared to the rest of the world, America's looking pretty good ... for now.

11:24 a.m. ET, May 19, 2020

Some companies that need loans are falling through the cracks. The government is working on that

From CNN Business' David Goldman

The US government is trying to broaden the criteria for its business lending -- but some companies are unable to secure loans for one reason or another.

Outrage bubbled over when large businesses like Shake Shack received small business loans, yet many others were unable to receive them or even to qualify for those loans.

Among those that don't qualify for various government lending facilities are life insurance companies. That's because they sell debt with credit ratings that are analyzed by insurers' own industry group, but not by traditional credit ratings agencies. And some have employees in excess of the 10,000-worker cap.

Both Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee that they are working on that problem.

"If there are companies that slipped through, [Powell] and I will work together to make sure they have funding," Mnuchin said.

Powell noted that some of the lending facilities have only just come online, so the amount that has gone out to support some businesses is "pretty limited."

11:09 a.m. ET, May 19, 2020

Powell: Struggling local governments could hold back the economic recovery

From CNN Business' Anneken Tappe

State and local governments have laid off about 1 million workers because of the coronavirus crisis, which will likely weigh on the nation's economic recovery, said Federal Reserve Chairman Jerome Powell in response to a question from Senator Bob Menendez.

Evidence from the 2008 financial crisis shows that hiring freezes by local governments may have lengthened and deepened the resulting recession, Powell said.

On April 9, the Fed announced the creation of a Municipal Liquidity Facility, which will provide up to $500 billion in loans and $35 billion in credit protection to "help state and local governments manage cash flow stresses caused by the coronavirus pandemic."

11:04 a.m. ET, May 19, 2020

Why you shouldn't worry about the government buying hundreds of billions of dollars in stuff no one wants

From CNN Business' David Goldman

The Federal Reserve is buying up hundreds of billions of dollars in loans, asset-backed securities and other securities no one wants right now as the economy plunges.

That worked out pretty well 10 years ago -- taxpayers made a profit! -- and Federal Reserve Chairman Jerome Powell said that he's confident it will work again this time.

Powell noted that the Fed is taking measures to ensure taxpayers, who will be left holding the bag, are protected: The Fed is only buying AAA-rated loans with a "good-sized" haircut (i.e. on the cheap).

"The credit risk is very low," Powell testified before the Senate Banking Committee.