Mnuchin’s move reduces Fed’s lending power, but sources say emergency programs can be revived

The decision by Treasury Secretary Steve Mnuchin to allow several Fed emergency lending programs to expire on December 31 will significantly reduce the central bank’s ability to support the financial system. But people familiar with the situation say the Fed will still have considerable lending power in the event of a shock to the system.

Mnuchin issued a letter Thursday saying he would not extend any Fed programs that used congressional CARES law funds. Created in response to the financial panic that accompanied the lockdowns in the spring, these programs have given the Fed the ability to lend up to $ 4.5 trillion in various financial markets. Mnuchin argued that the intention of Congress was for the funds to expire.

The Fed, in an unusual statement, made public its disagreement with the decision, saying: “The Federal Reserve would prefer the full suite of emergency facilities established during the coronavirus pandemic to continue to play its important role as a safety net for our and a vulnerable economy. “

But people familiar with the move say Mnuchin or a new Treasury secretary in the Biden administration may decide to revive emergency lending programs as part of a new deal with the Fed. About $ 25 billion in equity from the treasury will be left with the Fed from the CARES Act funds. In addition, the Treasury has about $ 50 billion in the Exchange Stabilization Fund. Using 10-to-1 leverage – what it used for emergency programs – the Fed will have around $ 750 billion in lending authorities to support markets in the event of a disruption. Congress approval will not be required. There will however have to be a new agreement between the Secretary of the Treasury and the Federal Reserve Board of Governors.

So far, the Fed has only loaned about $ 25 billion to programs that are being shut down, which makes the $ 750 billion quite significant in context.

This is not an optimal arrangement from the Fed’s point of view, as it would likely take another shock to the financial system to precipitate the restart of programs. The Fed had hoped to avoid this shock by keeping the programs in place. But the money would be so necessary there.

Meanwhile, the return of the Fed’s unused $ 429 billion to the General Fund creates an already-funded pot of money that Congress could decide to use to fund extended unemployment benefits or additional loans or grants to small businesses. . There is an additional $ 135 billion in unused money already funded by the paycheck protection program. A new relief program could also include new funds allocated by Congress, but much of it is already funded.

The biggest loser appears to be the midsize companies that appear to be just starting to take out loans under the Fed’s Main Street loan facility. The terms of the facility were recently changed to allow more modest loans of only $ 100,000. It will likely be close to new loans in a few weeks and can only be retired with an agreement between the Fed and the Treasury.

It is precisely for this reason that the American Chamber of Commerce criticized Mnuchin. He said in a statement: “A surprise termination of the Federal Reserve’s emergency liquidity programs, including the Main Street loan program, 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. “

Mnuchin extended three programs that did not use CARES Act funds for 90 days, including facilities that supported commercial paper and money markets.