Fed, Treasury Secretary Mnuchin at odds over letting emergency lending programs expire

U.S. Treasury Secretary Steven Mnuchin has instructed the Federal Reserve to close down its emergency lending facilities and return unused money designed to support small- and medium-sized businesses and state and local governments.

The Fed counters that doing so would be a huge mistake, a rare instance of public disagreement between the two government bodies that have spent the last eight months engineering a response to the sharpest recession since the Great Depression.

“While portions of the economy are still severely impacted and in need of additional fiscal support, financial conditions have responded and the use of these facilities has been limited,” Mnuchin told Fed Chairman Jay Powell in a letter dated November 19.

In his letter, Mnuchin ordered the Fed to let nine of its 13 emergency facilities expire on December 31: two backstopping corporate bond markets (Primary, Secondary Market Corporate Credit Facilities), five offering loans to small- and medium-sized businesses (Main Street Lending Program), one offering credit to state and local government bond issuers (Municipal Liquidity Facility), and one backstopping markets for asset-backed securities (Term Asset-Backed Securities Loan Facility).

Mnuchin’s letter adds that the Fed will have to return unused money back to the Treasury, estimated to be about $429 billion, once the targeted facilities close down.

The Fed begged to differ, arguing that financial markets and the economy still need the backstops. Economists have warned of the threat of more shutdowns as COVID-19 cases break new highs across the country.

“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 Thursday afternoon.

Mnuchin said in the “unlikely event” that the facilities are needed again, the Fed could request approval to re-open them.

Low uptake: good or bad?

Twelve of the Fed’s 13 liquidity facilities were already scheduled to expire on December 31, many of which were backed by $454 billion in funding allocated to the Fed and Treasury by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March.

By statute the Fed and the Treasury are supposed to work together on the terms of the facilities, meaning that Thursday’s public spat between the monetary and fiscal policymakers will have to be ironed out at some point.

Critics of the liquidity facilities pointed to the low uptake of the facilities, with only $25 billion in loans funded from the liquidity programs, which are capable of up to $2 trillion in capacity.

The Fed has countered that low uptake is because borrowers have been able to get credit in the private markets, possible only because of the backstops put in place by the central bank.

Fed officials have warned of the consequences of not extending the backstops. On Wednesday, Richmond Fed President Tom Barkin told Yahoo Finance that “taking [the liquidity facilities] away obviously means taking a risk.”

Meanwhile, Mnuchin ordered the Fed to extend three of the 13 facilities by an additional 90 days: two addressing short-term funding markets (Money Market Mutual Fund Liquidity Facility, Primary Dealer Credit Facility) and one allowing banks to shop Paycheck Protection Program loans to the Fed as collateral. Mnuchin also extended the Commercial Paper Funding Facility, which offers liquidity to companies looking for short-term financing.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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