The late hurdle to a deal came as leaders on both sides sought to finalize a compromise that would help the world’s largest economy weather the latest surge in coronavirus cases and support the slowdown in the recovery.
The Fed loan dispute erupted unexpectedly on Thursday, when Pat Toomey, Republican Senator from Pennsylvania, said he and other lawmakers in his party had been pushing to include a provision preventing the Fed from reviving a series of pandemic loan facilities that are due to expire at the end of the year.
Democrats reacted angrily to Mr Toomey’s decision on Friday, saying it could limit the ability of US policymakers to respond to next year’s economic recession.
“As we go through an unprecedented economic crisis, it is in the interests of the American people to maintain the ability of the Fed to respond quickly and forcefully,” said Brian Deese, who was hired by President-elect Joe Biden to be director of the National Economic Council in its administration.
“Undermining that authority could mean fewer loans to Main Street businesses, higher unemployment and greater economic hardship across the country.”
Data released Thursday night revealed an increase in requests for assistance from the Fed’s Main Street Lending Program, which was set up to help struggling small and medium-sized businesses and expires on December 31.
Maxine Waters, chair of the House Financial Services Committee, and Richard Neal, chair of the House Ways and Means Committee, issued a joint statement criticizing Mr Toomey’s decision. “The extreme demand from Senate Republicans threatens to derail this urgent action, and it must be immediately dropped so that we can move forward,” they said.
“The proposals to sabotage President Biden and our nation’s economy are reckless, they are bogus, and they have no place in this legislation,” said Elizabeth Warren, the Massachusetts senator, in a statement.
As friction increased, Republicans retorted that Democrats were more interested in preserving the tools to save financial markets than in making a deal. They also pointed out that members of their party, including Mr Toomey, had long pushed for the idea of limiting the Fed’s ability to reactivate its lending facilities, so it shouldn’t have come as a surprise.
“The language Senate Republicans are advocating affects a very small universe of lending facilities and is by no means a general overhaul of the Federal Reserve’s emergency lending authority,” Toomey said on Friday, defending his plan.
Larry Kudlow, Donald Trump’s chief economic adviser, said the White House strongly supports his position, as do other Republican colleagues.
John Cornyn, the Republican senator from Texas, added on Twitter that the provision “would simply force accountability and consensus rather than allow unilateral action” while Tom Cotton, the senator from Arkansas, said that “Democrats are crazy because they want to use the Fed as a slush fund ”.
The future of the Fed’s crisis lending facilities has been on hold since Steven Mnuchin, the US Treasury Secretary, asked the Fed to shut down a number of them at the end of the year, including those that buy corporate and municipal debt.
The Fed and Treasury would have the power to revive them without Congressional approval, using more limited funding from a rainy day fund in the Treasury, but Mr. Toomey’s plan would stand in the way.
The Fed loan clash means negotiations are now expected to continue over the weekend. Lawmakers had hoped to strike a deal before a deadline expired Friday evening to avoid the government shutdown, so the House of Representatives was forced to approve a draft bill to extend government funding by two days more until Sunday.
The Senate was due to consider a similar measure later on Friday.
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