Mnuchin Plans to End Some Emergency Fed Facilities
WASHINGTON — Treasury Secretary Steven Mnuchin said he does not plan to extend several key emergency lending programs beyond the end of the year, a decision that could hinder President-elect Joseph R. Biden Jr.’s ability to use the Federal Reserve’s vast powers to cushion the economic fallout from the virus.
Mr. Mnuchin on Thursday said he would not extend the Fed’s programs that support the markets for corporate bonds and municipal debt, as well a program that extends loans to mid-sized businesses. The programs expire at the end of 2020.
The pandemic-era programs, which are run by the Fed but use Treasury money to insure against losses, have provided an important backstop that has calmed critical markets since the coronavirus took hold in March. Removing them could leave crucial corners of the financial world vulnerable to the type of volatility that cascaded through the financial system in March. And by asking the Fed to return unused funds, Mr. Mnuchin could prevent Mr. Biden’s incoming Treasury secretary from restarting the efforts in 2021.
“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,” the central bank said in a statement.
The programs were backed by a $454 billion appropriation created as part of the government’s pandemic response package. Because of the way its emergency lending powers work, Jerome H. Powell, the Fed chair, needs the Treasury secretary’s signoff to make major changes to the programs’ terms. Extending the end date counts as a material change.
“I am requesting that the Federal Reserve return the unused funds to the Treasury,” Mr. Mnuchin said in a letter on Thursday. He noted that he had been “personally involved in drafting the relevant part of the legislation” and believed it was Congress’s intent that the programs stop at the end of the year.
Mr. Mnuchin did agree to extend other emergency loan programs that do not include that congressional money, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.
Allowing many of the Fed’s more novel programs to expire at a moment when the virus continues to surge will hamstring Democrats and could harm the economy just as the new administration enters office.
Many of the facilities, including one that buys state and local debt and another that encourages banks to lend to small and mid-sized businesses, have been lightly used. But that is because they are designed as backstops, meaning that borrowers would likely only use them when times are bad. With coronavirus cases on the rise, the economy may sour again, making them more essential.
Several of the programs — including the ones that support corporate bonds — have worked by convincing investors that the Fed is ready to step in as a backstop. Removing them now could undermined that confidence.
If the Fed does give back untapped funds, a Democratic administration will not be able to simply restart the programs, because the congressional appropriation cannot be used to make new loans after the end of the year. The facilities could only have been extended because the Treasury’s loans to the Fed — which in turn back new loans to other entities and bond purchases — were already outstanding. It will take a new appropriation or some more creative solution to insure the facilities against credit losses.
This is developing story. Check back for updates.