Mnuchin decision cuts Fed lending power, but sources say emergency programs can be revived

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US Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell share an elbow salute before testifying before a House Financial Services Committee hearing on monitoring the response to the coronavirus disease pandemic (COVID-19) from the Treasury Department and the Federal Reserve on Capitol Hill in Washington, September 22, 2020.

Joshua Roberts | Swimming pool | Reuters

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 announced on Thursday that he will not extend the Fed’s programs who used the funds from the CARES Act of Congress. Created in response to the financial panic that accompanied the spring lockdowns, 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 Mnuchin’s decision, saying: “The Federal Reserve would rather the full suite of emergency facilities established during the coronavirus pandemic continue to play its important supporting role for our still strained and vulnerable economy. “

But people familiar with the decision say that Mnuchin or a new treasury secretary in the Biden administration may decide to relaunch emergency lending programs as part of a new deal with the Fed.

About $ 25 billion of treasury equity 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. However, it will require a new agreement between the Secretary of the Treasury and the Board of Governors of the Federal Reserve.

So far, the Fed has only loaned about $ 25 billion of 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.

Returning the Fed’s unused $ 429 billion to the general fund creates an already-funded pot of money that Congress could decide to use to bolster extended unemployment benefits or to provide 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 businesses that appear to be just starting to take out loans under the Fed’s Main Street loan facility. The terms of the facility have recently been changed to allow for smaller loans of as little as $ 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.

The United States Chamber of Commerce criticized Mnuchin for this very reason, stating: “A surprise halt to the Federal Reserve’s emergency liquidity programs, including the Main Street loan program, prematurely and unnecessarily binds the hands of the incoming administration and closes the door to important liquidity options for companies when they need them most. “

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

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