Mnuchin plans to end some emergency power facilities

WASHINGTON – Treasury Secretary Steven Mnuchin has said he does not plan to extend several key emergency lending programs beyond year-end and has asked the Federal Reserve to return the money that argues, a move that could hamper President-elect Joseph R. Biden Jr.’s ability to use the broad powers of the central bank to cushion the economic fallout from the virus.

Mr Mnuchin said Thursday he would not pursue Fed programs, including those that support the corporate bond and municipal debt markets and the one that provides loans to midsize companies. Emergency efforts expire at the end of 2020, but investors expected some or all of them to remain operational as the virus continues to pose economic risks.

Pandemic era programs are run by the Fed but use Treasury money to insure against losses. They provided an important safety net which has critical markets appeased since the coronavirus took hold in March. Removing them could leave important corners of the financial world vulnerable to the kind of volatility that echoed through the system as virus fears mounted in the spring.

By asking the Fed to return the unused funds, Mr Mnuchin could prevent Mr Biden from new treasury secretary to quickly relaunch large-scale efforts in 2021.

“The Federal Reserve would prefer that all of the emergency facilities put in place during the coronavirus pandemic continue to play their important role as a safety net for our still strained and vulnerable economy,” the central bank said in a statement.

The emergency programs were backed by $ 454 billion that Congress appropriated in March as part of a larger pandemic response package. Because of the way the Fed emergency loan powers Fed Chairman Jerome H. Powell needs Treasury Secretary approval to make major changes to program terms. One of the changes that require approval is the extension of the end date.

The decision to close the various programs and cut the funding seemed to surprise the Fed, which received a letter Thursday afternoon announcing the Treasury’s desire to recover the money.

“I demand that the Federal Reserve return the unused funds to the Treasury,” Mnuchin said in the letter. He noted that he had been “personally involved in drafting the relevant part of the legislation” and believed it was Congress’ intention that the programs cease at the end of the year.

Earlier this month, Mr Powell said the central bank and the Treasury were just starting to discuss whether to extend the programs.

Mr Mnuchin has agreed to expand other emergency loan programs that are not backed by Congressional credits, including those that serve the short-term corporate debt market, one for market funds. monetary and one that supports government loans to small businesses.

The Fed is avoiding credit losses when granting loans, and throughout the pandemic crisis, it has called for a Treasury safeguard for its riskier programs. If it returns unused money that the Treasury has already spent on program support, as Mnuchin has requested, the Biden administration will have less financial support to restart the programs.

That’s because Congressional appropriations – of which $ 195 billion has been earmarked for specific Fed programs – cannot be used to make new loans after year-end. But while the law prohibits the Treasury from putting money into the Fed’s facilities after 2020, it obviously doesn’t prevent the Fed from using already earmarked Treasury funding to secure its own loans and bond purchases.

“Loans, loan guarantees and investments made by the Treasury are the applicable language,” said Peter Conti-Brown, attorney and Fed historian at the University of Pennsylvania. He said that while it is possible to read the law as preventing further Fed lending, it is not the “obvious reading.”

The Fed and the next Treasury Secretary have an alternative to continuing the programs: They could use money from the Treasury’s Exchange Stabilization Fund, which still has around $ 74 billion in uncommitted funds, to support the programs. It is not known exactly how much of the fund can be used, but the programs have not, to date, required substantial capacity.

Mr Mnuchin’s decision could leave the government with fewer options to help the economy as the new administration takes office.

“The Treasury is right that a limited set of targets have been met in terms of stabilizing bond markets,” Jason Furman, a prominent Democratic economist, said on twitter. “But what’s the downside of suing them as insurance against worse developments?” “

Many of the Fed’s programs, including one that buys public and local debt and one that encourages banks to lend to small and medium-sized businesses, have received little use. But that’s because they were designed as safety nets, which means borrowers would likely only use them when times are tough.

And it was Mr. Mnuchin himself who was conservative in defining the terms of the program. With a more permissive head of the Treasury, the terms could have been made more generous.

In fact, Democrats were considering both the municipal bond buying program and the Main Street lending effort for small and medium-sized businesses as potential back-up options if it proves difficult to adopt a additional government relief. Without them, businesses and state and local governments would have one less potential source of aid.

With the increase in coronavirus cases, the economy could deteriorate again, making programs more necessary. As late as Tuesday, Mr. Powell warned of the potential for economic scars and said the economic recovery had “a long way to go”. But Treasury officials have expressed optimism that the economy is poised to rebound steadily and that the likely deployment of a vaccine by the end of the year further improves the economic situation.

Republican Senator Patrick J. Toomey of Pennsylvania, who had pushed Mnuchin to end the programs, applauded the decision.

“These temporary facilities have helped both normalize markets and produce record levels of liquidity,” Toomey said in a statement. “The intention of Congress was clear: these facilities were to be temporary, provide liquidity and cease operations by the end of 2020.”

The Treasury move has raised concern among Democrats, some of whom have said the Fed should simply refuse to return the money – a route it is unlikely to take.

Bharat Ramamurti, a Democrat who sits on the congressional watchdog charged with reviewing the various Fed and Treasury programs, suggested on Twitter that the Fed has no legal obligation to return the funds.

“As part of its contracts with the Treasury, the Fed can and should reject the request,” he said. noted. “While Secretary Mnuchin says the intention of Congress was to suspend all new loans at the end of the year, the text of the CARES law does not say so. At a minimum, the Fed can continue to lend using the $ 195 billion in equity the Treasury has already committed. “

Emily Cochrane contributed reporting.


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