Mnuchin Ends Some Pandemic Loan Programs Fed Deems Essential

U.S. Treasury Secretary Steven Mnuchin said on Thursday that the Federal Reserve’s major pandemic lending programs would expire on December 31, putting the outgoing Trump administration at odds with the central bank and potentially increasing the stress of the economy as President-elect Joe Biden organizes his administration.

In a letter to Fed Chairman Jerome Powell, Mnuchin said the $ 455 billion allocated to the Treasury under the CARES Act last spring, much of which was earmarked to support Fed loans to businesses , nonprofits and local governments, should instead be available for Congress to reassign them.

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The move comes as data shows the rapid and rapid recovery from a historic plunge in the economy is fading, with more than 10 million people who had jobs in January still out of work.

“I call on the Federal Reserve to return the unused funds to the Treasury,” Mnuchin said in a letter to Powell, refusing to extend programs that the central bank deemed essential to ensure that credit flows to all parts of the country. economy during the worst economic downturn in a century.

The announcement was not expected by Fed officials, who said this week that the programs should be extended, and told Mnuchin immediately after his decision was made public.

In an emailed statement, the Fed said it “would prefer that all emergency facilities established during the coronavirus pandemic continue to play their important role in supporting our still strained and vulnerable economy.”

“I think given the economic situation and there is still so much uncertainty, it’s safe to keep these things open,” Atlanta Fed Chairman Raphael Bostic said in an interview with Bloomberg Television. Bostic is on the shortlist to be Biden’s Secretary of the Treasury.

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The announcement could signal potential problems for the incoming Biden administration. Although the programs were not widely used, Fed officials felt their presence reassured financial markets and investors that credit would remain available to help businesses, local agencies and even organizations to recover. nonprofit to weather the pandemic crisis.

“A surprise termination … prematurely and unnecessarily ties the hands of the incoming administration, and closes the door to important liquidity options for businesses when they need it most,” said Neil Bradley, Managing Director policies of the American Chamber of Commerce.

“For about three weeks in January, the markets will operate without the support they have had since the spring,” JPMorgan analyst Michael Feroli said, referring to the time between the expiration of the Fed’s programs and the inauguration of Biden, a Democrat. , whose programs the Secretary of the Treasury could reopen.

The announcement lowered yields on benchmark US Treasuries and stock index futures.

The yield on 10-year Treasuries slipped 2 basis points and was the lowest in 10 days at 0.83%. Futures on the S&P 500 emini index fell 0.7% after reopening at 6 p.m. EST (11 p.m. GMT) for the overnight trading session.

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Mnuchin authorized a 90-day extension to a group of other programs that provide liquidity to major financial markets, including those for short-term business credit.

But Fed officials have stressed in recent days that the economy as a whole is not yet out of the woods, with the pandemic spreading, millions of unemployed and large business sectors suffering from downturns. the Depression.

In his letter to Powell, Mnuchin said that in the “unlikely event” the loan programs would be required again, the Fed could ask the Treasury to reinstate them with funding from the Treasury’s stability fund or with new money. of Congress.

The programs, especially the Main Street and local government landing programs, raised the prospect of billions of dollars in central bank credit flooding an economy that had been partially shut down in the spring due to the pandemic.

As of Thursday, the Fed had made just $ 5.4 billion in loans on Main Street, data showed Thursday. The Municipal Liquidity Facility had issued only about $ 1.7 billion in loans.

But the programs were seen as an important part of the pandemic response, expanded at the behest of lawmakers who wanted the central bank’s lender of last resort powers, usually limited to financial institutions, to be open to all. economy due to the dramatic impact of the pandemic. on trade.

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U.S. Democratic Representative James Clyburn, chairman of the House Special Committee on the Coronavirus Crisis, said there was “absolutely no justification” for Mnuchin to suspend Fed lending programs amid the crisis health, and asked him to reconsider his decision.

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Some Republicans in Congress believe it is time, however, for the Fed to pull out, even with coronavirus infections at record levels and a vaccine rolling out likely for months to come.

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Pat Toomey, a Republican senator set to lead the Banking Committee if Republicans occupy the Senate, applauded the Treasury’s actions.

“These facilities… have successfully achieved their goal,” he said. “Once liquidity is restored, it is expected to expire, as Congress has intended and the law requires, by December 31, 2020.”

Others were not convinced.