US President Donald Trump’s administration on Thursday moved to end several emergency pandemic lending programs at the Federal Reserve, triggering a rare public rift when the central bank objected to the Department of Treasury’s instruction.
US Secretary of the Treasury Steven Mnuchin, in a letter to Fed Chairman Jerome Powell, sought a 90-day extension for four of the central bank’s emergency lending programs, while requesting five other programs expire on schedule on Dec. 31 and the Fed return unused funds, allowing Congress to reappropriate US$455 billion and spend the money elsewhere.
The Fed responded in a short statement that it “would prefer that the full suite of emergency facilities established during the COVID-19 pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
The conflict — a rare public rift between the Fed and the Treasury — comes as the US recovery faces increasing pressure from a resurgent coronavirus pandemic and follows months of deadlock between Republicans and Democrats over the size and type of additional fiscal stimulus. Removing some of the emergency programs has the potential to leave the economy more vulnerable as US president-elect Joe Biden prepares to take office in January.
“I am befuddled. It adds insult to injury to an economy that is about to be flooded by the surge in COVID cases, hospitalizations and deaths,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “If anything, Treasury should be shoring up the storm wall of these facilities.”
The emergency programs created by the Cares Act, the stimulus Trump signed earlier this year, were set to expire at the end of the year.
Mnuchin is seeking to end the primary and secondary market corporate credit market facilities, the Municipal Liquidity Facility, the Main Street Lending Program and the Term Asset-Backed Securities Loan Facility.
“The economy has responded very strongly, but there are still areas of the economy that need more support,” Mnuchin said in an interview. “That’s why I’m encouraging Congress to reallocate this money.”
The secretary sought a 90-day extension for the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program (PPP) Liquidity Facility.
The Fed programs were launched this spring to stabilize markets and extend credit to US companies as the COVID-19 pandemic took hold. They helped quell the panic, but take-up has been relatively low — which the Fed says is a sign that they have worked.
Republicans in Congress have used that to argue that they are no longer needed and the billions of dollars sent to the central bank to set them up can be deployed better elsewhere. Democrats, as well as the Fed, say that removing the safety net of these programs as the virus surges again through the country is not a good idea.
“I do think it’s critical that the 13(3) programs, the public market backstop programs and programs that support Main Street and the PPP, that they continue beyond year-end. I think that’s very important,” Dallas Fed President Robert Kaplan said earlier on Thursday in an interview on Bloomberg TV, referring to the section of the Federal Reserve Act providing the authority for emergency lending.
US Senator Pat Toomey, a Republican, praised Mnuchin’s move.
“With liquidity restored,” the programs should expire, “as Congress intended and the law requires,” Toomey said in a statement.
The Fed’s intervention into corporate bond markets was particularly effective, staving off a massive wave of bankruptcies. However, the government support also stoked record amount of issuance and ultra-low rates, resulting in worries that credit markets were overheating and taking too much risk.
While investors had expected the buying program to continue well into next year, market watchers were relatively sanguine about the demise — for now.
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