Mnuchin seeks to end several Federal Reserve emergency lending programs

Marco Green
November 22, 2020

Senate Majority Leader Mitch McConnell (R-KY) echoed Mnuchin Friday, saying that he supports the idea of repurposing various unused emergency funds, the value of which he pegged at $580 billion.

"What matters is that if the facilities are there, the market knows that if things go wrong" the Fed will step in if needed, said Roberto Perli, head of global policy research at Cornerstone Macro.

Critics said the Treasury Department's move was created to hinder President-elect Joe Biden's administration by halting needed lending.

The conflict - a rare public rift between the Fed and the Treasury - comes as the U.S. 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. Democrats and Republicans have to date had widely different views on the amount of fresh appropriations needed for Covid-19 relief. Removing some of the emergency programs has the potential to leave the economy more vulnerable as USA president-elect Joe Biden prepares to take office in January.

U.S. Treasury Secretary Steven Mnuchin on Thursday asked the Federal Reserve to end five emergency COVID-19 lending facilities and return 455 billion U.S. dollars of unused funds.

Critics pounce: The Fed issued a statement late Thursday expressing its criticism of Mnuchin's decision. "This follows a disturbing pattern of this administration putting petty grievances ahead of the health and safety of the American people". And they became tied statutorily in the Cares Act economic rescue package in March that appropriated money for the Treasury to support Fed backstops for everything from municipal to corporate finance.

Talks between the Republicans and Democrats on stimulus have been stalled for months. "Those are the people we need to help the next few months", Mnuchin said. Mr. McConnell, who has taken the lead in negotiating on the GOP's behalf, has instead pointed to a roughly $650 billion Senate measure as the appropriate fiscal response.

The official told Reuters in a phone interview that the Fed facilities will not be dissolved, and can be quickly recapitalized to a lending capacity of $750 billion to $800 billion with funds from Treasury's Depression-era Exchange Stabilization Fund. The Congressional Budget Office assumes that loans will be repaid, so failing to offer the loans in the first place does not yield any measurable savings.

Both want Congress to reallocate unspent stimulus funds to support small businesses.

On Thursday, aides to Pelosi, McConnell, Schumer and House Minority Leader Kevin McCarthy met to discuss a separate $1.4 trillion funding bill that's needed to keep the federal government open after December 11. He called on House Democrats to join with Republicans in freeing up $138 billion for the Paycheck Protection Program, which could help small businesses keep staff on payrolls. That would provide at least one avenue for the Biden administration to provide stimulus without going through Congress.

In addition to Mr. Mnuchin's meeting with top Republicans on Friday, Mrs. Pelosi and Mr. Schumer are set to meet Friday with Mr. Biden, who has also called for a large relief bill this year.

"While the backstop measure have been little used so far, the deteriorating health and economic backdrop could shine a bright light on the Fed's diminished recession-fighting arsenal and prompt an adverse market reaction", said Gregory Daco, chief US economist at Oxford Economics.

The secretary on Thursday sent Powell a letter demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress.

Credit markets for corporations and municipalities froze up earlier this year because of the crisis.

Other reports by Click Lancashire

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