Mnuchin to cut off emergency economic support, ignoring Fed protest

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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 desires 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.

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.

The Fed and Treasury have joint responsibility for designing and authorizing the programs.

“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.

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.

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.

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