ACOVID-19-19 spread across America, its fiscal and monetary czars donned their masks, banged their elbows and presented a united front. Jerome Powell, Chairman of the Federal Reserve, cut interest rates and bought treasury bills and mortgage debt. Steve Mnuchin, Treasury Secretary, pushed through a $ 2.2 billion stimulus package that increased unemployment benefit generosity and provided funding to the Fed to support businesses and stakeholders in the market in need.
That partnership appeared to break down on Nov. 19, when Mr Mnuchin wrote to Mr Powell to tell him he would let several of the Fed’s emergency lending programs expire on Dec.31. He demanded that the Treasury funds that had been allocated to the Fed, as capital to support these programs, be returned.
Mr Mnuchin’s decision earned a rare reprimand from the Fed, which said it “would prefer that all emergency facilities … continue to play their important role in supporting our still strained and vulnerable economy.” Weeks earlier, Mr Powell had said the couple were working on an extension. On November 20, however, he agreed to Mr. Mnuchin’s request. The Treasury had allocated $ 195 billion in capital to support the Fed’s programs, half of which had been transferred to the central bank. The Fed will now repay $ 70 billion, keeping $ 25 billion for loans it has already made.
Mr. Mnuchin stressed that programs that were to cease, including the facilities to buy corporate and municipal bonds and those that provide direct loans to businesses, were underutilized and appeared to have served their purpose. The Fed could have made up to $ 2 billion in loans; instead, he only lent $ 25 billion. The regimes were intended to quell market dysfunction; Corporate and municipal credit spreads on treasury bills have since normalized, and companies have been able to issue a lot of debt.
Emergency loan programs can act as a kind of insurance even if they are not widely used. Indeed, the simple announcement of the plans in the spring served to revive the credit markets, even before anything was bought. But capital markets seemed to broadly approve of the idea that the Fed’s emergency lending programs were no longer needed. Stock market futures and bond yields edged down slightly, as Mr. Mnuchin’s letter came out, but both rallied at the end of the day. Credit spreads have not widened.
What could explain Mr. Mnuchin’s actions? With government bond yields close to historic lows, the cost of allocating capital to the Fed’s facilities is low. But the political costs may have been higher. When Mr. Mnuchin and Mr. Powell testified before Congress in September, as many as seven representatives asked them about the low use of the Main Street loan facility, which provides loans to businesses.
Mr Mnuchin suggested allocating some of the funds to other programs, such as the Paycheck Protection Program, a vehicle that lends to small businesses, which ran out of funds in August. Perhaps he is hoping that promising support for small businesses will influence Republicans reluctant to endorse another stimulus package. A less charitable explanation is that he wants to stand in the way of the next administration. The money returned will go to the General Treasury Fund, which will require legislation if it is to be used. If Janet Yellen, President-elect Biden’s choice as Treasury Secretary, wants to use her, she’ll have to get the votes first. â
This article appeared in the Finance & economics section of the print edition under the title “A clash over cash”