Steven Mnuchin made it known that the Treasury will let emergency lending programs expire on December 31. In addition, he asked the Federal Reserve to return any unused money. These include those that support the markets for corporate bonds and municipal debts. They also include the program that extends loans to small and mid-sized businesses.
In a letter to Federal Reserve Chairman Jerome Powell, Mnuchin said the programs “have clearly achieved their objectives.” As such, they will not need an extension going into 2021. “I am requesting that the Federal Reserve return the unused funds to the Treasury,” he wrote. Mnuchin said that he was “personally involved in drafting the relevant part of the legislation.” Thus, he believed Congress intended the programs to stop by the end of the year.
Which Programs are Expiring?
Mnuchin’s letter to Powell informed their willingness to let five programs expire on schedule. Also, the Treasury requested 90-day extensions for four emergency lending programs. Congress can reappropriate the returned $455 billion fund for spending elsewhere.
Specifically, the programs Mnuchin prefers to expire by year-end include the primary and secondary market corporate credit facilities. In addition, they are okay with ending the Municipal Liquidity Facility, the Main Street Lending Program, and the Term Asset-Backed Securities Loan Facility. Meanwhile, the Treasury sought extensions for four programs. These are the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, and the Paycheck Protection Program Liquidity Facility.
The Federal Reserve expressed disappointment in the decision to close the various programs. In a statement, they said, “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
Powell preferred the lending programs to stay for the time being. In remarks made Tuesday, he said the programs need more time.
He said: “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away.”
The Market Reacts
The Treasury’s decision move poses a risk. Markets may lose the trademark confidence knowing the Fed is right behind them. The absence of Fed programs removes the backstop that’s needed when things go south. From here on, the market assumes all the risk. This is especially important given the resurgence of the coronavirus. A lingering pandemic can cripple the economy even longer. Kathy Jones, the chief fixed-income strategist at Charles Schwab, likened it to playtime. She tweeted: “Mnuchin decides to quit and take his toys with him. Wow.”
Krishna Guha of Evercore thinks removing backstops might be tricky. “The question is when is the right time to do it in a way that doesn’t run any risk whatsoever of a resumption of market stress. You could get lucky, and this ultimately passes without causing severe damage. But if you are unlucky, this could end up being extremely costly,” said Mr. Guha.
‘No Longer Needed’
Republican congresspeople agreed with Mnuchin’s assessment. They said that some programs are no longer necessary. The billions of dollars in their budget can serve better purposes elsewhere. Representative Pat Toomey (R-Pa) supported Mnuchin’s letter. He welcomed the expiration of the programs to restore liquidity. He also said the deadline is “as Congress intended and the law requires.”
On the other hand, Democrats sided with the Fed. They argued that the country still needs these safety nets. After all, the US is still dealing with a resurging virus as infections and the body count continue to rise. Bharat Ramamurti, a member of the COVID-19 Congressional Oversight Commission, even suggested that the Fed was under no obligation to return the funds. “Under its contracts with the Treasury, the Fed can and should reject the request,” he said. He said the wording of the CARES Act doesn’t require a return. Ramamurti believes the Fed can continue using the equity already committed by Treasury.
Treasury officials remain optimistic that the economy is ready to rebound. The increasing likelihood of a vaccine this year points to a faster recovery. But until a vaccine is actually delivered, Powell thinks there’s a risk. The economy has “a long way to go,” and things might get worse before they get better.
The move leaves the incoming administration with fewer programs at their disposal. They will have fewer backstops to use when the economy starts to sputter again. As economist Jason Furman said: “What is the downside to continuing them as insurance against worse developments?”
Watch this as CNBC’s Squawk Box tells you why the Fed's emergency lending programs may still be necessary:
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