The US Treasury outraged the Fed by the decision to stop allocating funds to support the economy
Treasury Secretary Stephen Mnuchin said the Fed’s key pandemic lending programs will expire on December 31, putting the Trump administration at odds with the regulator and adding stress to the country’s economy while future President Joe Biden is organizing his new administration..
In a letter to the chairman of the Fed Jerome Powell Stephen Mnuchin wrote that the $ 455 billion allocated to the Treasury last spring, most of which went to bolster Fed lending to businesses, nonprofits and local governments, should instead be made available to Congress for redistribution.
Data shows that the rapid recovery from a historic economic downturn is rapidly dying, and more than 10 million people in the country are still unemployed.
«I demand that the Fed return unused funds to the Treasury», – said Mnuchin to Powell, refusing to renew programs that the central bank called critical to ensure the flow of credit to all parts of the economy.
This announcement was not expected by Fed officials, who said this week that the programs should be extended..
The Fed reported that «would prefer that the full suite of emergency relief measures introduced during the coronavirus pandemic continue to fulfill its important role as a pillar of the still vulnerable economy».
«I think given the current uncertainty and where our economy is now, it is prudent to continue with the financial support program.», – said the president of the Atlanta Fed Raphael Bostic in an interview with Bloomberg Television. He is shortlisted for the post of Treasury Secretary in the Biden administration.
This statement could be a signal of possible troubles for the new presidential administration.. Although the programs were not fully utilized, Fed officials felt that their presence had calmed financial markets and investors, and that loans would continue to help businesses weather the pandemic downturn..
«Mnuchin’s unexpected, premature and unjustified position ties the hands of the new administration and closes the door to important liquidity options for businesses at a time when they need them most», – said the chief political officer of the US Chamber of Commerce Neil Bradley.
Chicago Fed president says he’s disappointed by Treasury’s move to stop funding Fed lending programs
«For about three weeks in January, the markets will operate without the support they have received since spring.», – noted by JPMorgan analyst Michael Feroli, referring to the time between the expiration of the Fed’s programs and the inauguration of Biden, whose Treasury Secretary could resume the programs.
This announcement led to lower yields on US Treasury bonds and stock index futures..
10-year Treasury bond yield sags 2 basis points to lowest in ten days. S Index Futures&P 500 fell 0.7%.
It is worth noting that Mnuchin allowed a 90-day extension of a number of other programs that supply cash to major financial markets, including short-term corporate loans. But in recent days, FRS officials have emphasized that the economy has not yet emerged from the crisis, unemployment is high, and important areas of the economy still experiencing significant recession.
Mnuchin told Powell that if the loan programs are urgently needed again, the Fed could ask the Treasury to restore them with funding from its own fund or with funds from Congress. However, he believes that such an urgent need is unlikely.
Stimulus programs were seen as an essential element of the pandemic response, extended at the behest of lawmakers who wanted the Fed’s lender of last resort power, usually limited to financial institutions, to be open to the entire economy due to the pandemic’s disastrous trade impact..
Representative of the United States Democratic Party James Cliburn, Chairman of the House of Representatives Committee on Fighting the Coronavirus Crisis, said that Mnuchin «there is absolutely no reason to postpone the Fed’s loan programs in the midst of the crisis, and asked him to reverse this decision».
However, some Republicans in Congress believe it is time for the Fed to cut spending..
Pat Toomey, Republican senator willing to head the banking committee if his party holds positions in the Senate, backed Treasury action.
«These programs have successfully served their purpose. With the restoration of liquidity, they will end, as anticipated by Congress and required by law, by December 31, 2020.», – he said.
Not everyone shares this position.
«The Fed was one of the only sources of stability in Washington, and it is simply pointless to deny it the ability to offer support in the current situation.», – said Isaac Boltanski, Director of Political Research, Washington-based Compass Point Research & Trading.
«This is a depressing development that unnecessarily introduces uncertainty and volatility into the markets.», – he added.