Mitch McConnell says Congress should redirect unspent stimulus money to prop up small businesses, backing Mnuchin in his fight against the Fed

• McConnell backed Treasury's Mnuchin in his extraordinary clash with the Federal Reserve.
• Both want Congress to reallocate unspent stimulus funds to support small businesses.
• "American workers should not lose their jobs needlessly when a second round of the job-saving Paycheck Protection Program for the hardest-hit small businesses would make a huge difference," the Kentucky Republican said.

Senate Majority Leader Mitch McConnell issued a statement on Friday afternoon supporting Treasury Secretary Steven Mnuchin's call for Congress to repurpose unspent stimulus money — and backing the Trump administration in its extraordinary clash against the Federal Reserve.

McConnell said "there is an obvious right use" for the unused funds. He argued it should be directed at "urgent, important, and targeted relief measures" that Republicans have sought for months over repeated Democratic objections they are not enough to stem the hardship among people and many sectors of the economy.

"American workers should not lose their jobs needlessly when a second round of the job-saving Paycheck Protection Program for the hardest-hit small businesses would make a huge difference," the Kentucky Republican said. "Our medical system should not be denied additional support, including for distributing the life-saving vaccines that appear to be on the horizon."

The statement omits any reference to aiding unemployed Americans, a step Mnuchin said Congress could take with the funds on Friday. Next month, the US economy faces another cliff with 12 million jobless Americans at risk of losing all their unemployment benefits because federal initiatives are expiring.

McConnell's comments come as Mnuchin on Friday defended his decision to not extend five Fed emergency lending programs offering credit to businesses, cities, and states past December 31. The move triggered a rare rebuke from the central bank which said it wanted them to continue, forming a rift between two government institutions that had collaborated closely to manage the economic fallout of the pandemic this year.

In a CNBC interview, Mnuchin argued Congress designed the programs to end this year and the Fed had misinterpreted the law. "They weren't in the room, that's not their job," he said.

The Fed programs at the center of the dispute kicked in shortly after the CARES Act was passed in March. Congress allocated $454 billion to the Treasury to backstop Fed lending and calm turbulent markets as the pandemic struck. While the Treasury can't distribute money past the end of the year, the law lays out earmarked funds can remain in place, undercutting Mnuchin's claim.

He urged Congress to reallocate the money, though it would require the Fed to sign off as well.

"We don't need this money to buy corporate bonds. We need this money to go help small businesses that are still closed or hurt, no fault of their own," he told CNBC. "Or people who are gonna be on unemployment that's running out."

On Friday afternoon, Federal Reserve chair Jerome Powell took a more conciliatory tone with Mnuchin in a letter. He credited the programs with preserving stability in the financial system and said unspent funds would be returned.

"We will work out arrangements with you for returning the unused portions of the funds allocated to the Cares Act facilities in connection with their year-end termination," Powell wrote.

Democrats assailed Mnuchin for not extending the programs. They argued it would limit the tools available to President-elect Joe Biden to strengthen the economy. The Biden transition team blasted the move in a statement to the Washington Post, calling it "deeply irresponsible."

"At this fragile moment, as the COVID and economic crises are re-accelerating, we should be reinforcing the government's ability to respond and support the economy," spokesperson Kate Bedingfield said.

The treasury secretary also faced criticism from economists and some Republicans as virus cases surge, prompting renewed restrictions and closures that experts fear could set back the economic recovery. However, the Trump administration struck a more optimistic tone about the risks facing the US economy.

"The economy has tremendous momentum," White House National Economic Council Director Larry Kudlow told reporters on Friday. He also said there is "a lot of hardship out there" and reiterated the administration's support for targeted aid.