The US Treasury has decided not to extend several emergency lending facilities set up by the Federal Reserve at the start of the coronavirus pandemic, prompting a rare expression of disappointment from the central bank, which warned that the economy remained “strained and vulnerable”.
In a letter to Fed chairman Jay Powell on Thursday Steven Mnuchin, Treasury secretary, asked the central bank to return unused funds from five emergency programmes that are set to expire in late December.
The facilities that Mr Mnuchin is looking to end include: two schemes set up to purchase corporate debt; five facilities created to lend to medium-sized businesses, collectively known as the Main Street Lending Program; one programme to lend to state and local governments; and another to support asset-backed securities.
Mr Mnuchin did, however, ask Mr Powell to extend four emergency credit facilities that backstop short-term funding markets, including commercial paper and money market mutual funds, for 90 days.
The Fed’s top officials have been making the case that an extension of the lending facilities would guarantee stability in financial markets at a time when the economic outlook is still fragile because of waning fiscal support and a surge in coronavirus cases.
“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 US central bank said in a statement on Thursday.
Mr Mnuchin has faced pressure from some Republicans on Capitol Hill to wind down the lending facilities, given the improvement in the recovery and concerns that the government backstop was distorting markets.
In his letter to Mr Powell, the Treasury secretary said that ending the emergency credit facilities would free up $455bn in funds that could be spent elsewhere by Congress. Mr Mnuchin said that in the “unlikely event” that the facilities were needed again, new approval would have to be sought from the Treasury department.
“I am deeply honoured to have worked on executing these programmes and hope that because of our collective actions, Congress will show similar trust in Federal Reserve chairs and Treasury secretaries in the future,” Mr Mnuchin wrote.
Many investors have supported the Fed’s push to preserve the emergency credit facilities as an insurance policy against a deterioration in financial markets, warning of the danger of removing a crisis-fighting weapon from its arsenal.
Neil Bradley, chief policy officer at the US Chamber of Commerce, the largest US business lobby group, criticised Mr Mnuchin’s announcement as “a surprise termination” that would “prematurely and unnecessarily tie the hands of the incoming administration, and closes the door on important liquidity options for businesses at a time when they need them most”.
Markets reacted swiftly to the Treasury announcement, with equity futures falling at the start of the trading day in Asia. The S&P 500 futures contract slid 0.9 per cent while Nasdaq 100 futures were 0.5 per cent lower at a time when trading is generally somewhat light.
Investors instead bought government bonds that are seen as havens. The yield on the 10-year Treasury slid to 0.82 per cent, down 0.05 percentage points from its high on Thursday. The yield on a bond falls as its price rises.
“The risk from a market perspective isn’t necessarily that [the Fed facilities] expire in isolation. The risk is that you have a couple things happen at once,” said Adam Marden, a multi-asset investment analyst for T Rowe Price, pointing out that the loss of the credit facilities could occur in combination with dwindling fiscal support and surging coronavirus infections next month.
Although Fed officials considered the credit facilities a crucial part of their coronavirus response, fuelling a big rally in financial markets after the initial slump, only a small fraction of the available lending capacity was used.
Some companies and local governments ended up securing better funding terms through regular capital markets and medium-sized businesses, particularly commercial real estate groups, complained that the terms of the facilities were too strict to benefit them.
One US Treasury official said Mr Mnuchin’s move could help unlock the stalled negotiations on a new round of fiscal stimulus by freeing up billions of dollars of money for Congress to allocate.
“All these funds can be spent without borrowing an additional dollar,” the official said.
Democrats have been pushing for more than $2tn in additional spending but have faced resistance from congressional Republicans, who want a far smaller relief package. There have been no substantive negotiations since the November 3 election.
The failure to extend some of the emergency credit facilities could hamper the ability of the incoming Biden administration to tackle the economic fallout from the pandemic, particularly if new strains start to emerge in financial markets. However, the Treasury could revive funding for the lapsed credit facilities in short order if necessary without congressional approval under certain conditions.
Pat Toomey, the Republican senator from Pennsylvania who had called for the lending facilities to end, applauded Mr Mnuchin’s decision. “Congress’s intent was clear: these facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020,” he said.
Additional reporting by Eric Platt and Andrew Edgecliffe-Johnson
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