Trump team to yank emergency economic support, triggering public Fed dissent

Treasury Secretary Steven Mnuchin on Thursday asked the Federal Reserve to return all unused coronavirus relief funds set aside for its emergency lending programs by the end of the year, taking away a lifeline even as a resurgence in Covid cases threatens to upend the budding economic recovery.

Mnuchin said the programs are no longer needed, but the move goes against the Fed’s desire to keep them going, according to a statement from the central bank, in a rare show of public disagreement between the two government agencies.

“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 Fed said.

The emergency programs, which were set to expire Dec. 31 unless extended, have doled out billions of dollars in loans to keep the economy afloat. Their mere existence helped restore stability to the financial system after panic over the coronavirus earlier this year threatened to shut down key debt markets.

The Fed and Treasury have joint responsibility for designing and authorizing the programs, some of which were created at the behest of Congress in a massive relief package, called the CARES Act, signed by President Donald Trump in March.

In a letter to Fed Chair Jerome Powell, Mnuchin described the lending facilities as successful, saying their joint efforts had boosted the ability of large corporations and state and local governments, as well as consumers, to borrow money at reasonable rates from private markets, without needing to turn to the central bank.

“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 said.

“I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent … was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020,” the Treasury chief added. “As such, I am requesting that the Federal Reserve return the unused funds to the Treasury.”

A Treasury secretary appointed by President-elect Joe Biden would be able to reauthorize the programs upon taking office, but that wouldn’t be until late January at the earliest. It is unclear whether this move will increase pressure on Congress to provide more economic relief.

At a public event this week, Powell said reports that an effective vaccine might soon be coming were “certainly good news” but warned that “the next few months may be very challenging.”

“The Fed will be strongly committed to using all of our tools to support the economy for as long as it takes until the job is well and truly done,” he said. “When the right time comes — and I don’t think that time is yet or very soon — we’ll put those tools away.”

Mnuchin in his letter nodded to “the unlikely event that it becomes necessary in the future to reestablish any of these facilities,” saying that any Treasury chief would be able to use other rainy day funds under the control of the department or could get additional funding from Congress.

He said the unused money, along with unused Treasury funds allocated for airlines and businesses critical to national security, would allow lawmakers to use $455 billion for other purposes.

The move is in line with calls by Sen. Pat Toomey (R-Pa.), the likely chair of the Banking Committee if the GOP holds the Senate, who said the programs had served their purpose. He expressed worry that if they are extended, they would be seen as a substitute for fiscal policy — the tax and spending decisions that are the responsibility of Congress and the president.

“I applaud Treasury Secretary Steven Mnuchin’s decision to wind down, by year-end, the CARES Act’s temporary, emergency lending facilities, as Congress intended and the law requires,” Toomey said in a statement Thursday. “These facilities, which were established in response to the unprecedented market turmoil caused by the COVID-19 pandemic earlier this year, have successfully achieved their intended purpose.”

But Democrats have urged the opposite, calling on the central bank to make the loan terms more generous as the darkening financial outlook for many companies and municipalities heightens the risk that even more Americans will be put out of work.

“Under its contracts with Treasury, the Fed can and should reject the request to return the $195B in CARES Act funds Treasury has already committed,” tweeted Bharat Ramamurti, a former aide to Sen. Elizabeth Warren (D-Mass.) who now sits on an oversight panel for these emergency programs. “But this indicates Treasury will force the Fed to shut down key programs at year-end, needlessly eliminating market protection.”

“Luckily, whatever the Trump Treasury does, the Biden Administration has the authority to ask the Fed to restart these lending programs next year,” he added. “And there clearly will still be a need for the small business and state and local lending programs two months from now.”

The largest U.S. business lobby also voiced its displeasure, particularly at the ending of the Fed's “Main Street” lending program designed for midsized businesses and nonprofits.

“A surprise termination of the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration and closes the door on important liquidity options for businesses at a time when they need them most,” U.S. Chamber of Commerce Chief Policy Officer Neil Bradley said in a statement.

“American businesses and workers are weary of these political machinations when they are doing everything in their power to keep our economy going,” he said.

Mnuchin has approved a 90-day extension for a group of Fed facilities that aren’t connected to the CARES Act funds passed in March. Those programs are directed at short-term business lending, general market functioning, and boosting banks that lent under the government-backed Paycheck Protection Program for small businesses.