Mnuchin’s determination reduces Fed lending, however sources say emergency packages could be revived

US Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell greet each other on Capitol Hill, Washington, before a hearing of the House Financial Services Committee on Monitoring the Treasury and Federal Reserve’s Pandemic Response. 22nd September 2020.

Joshua Roberts | Pool | Reuters

Treasury Secretary Steve Mnuchin’s decision to allow several Fed emergency loan programs to expire on December 31st will dramatically reduce the central bank’s ability to halt the financial system. However, those familiar with the situation say that in the event of a system shock, the Fed will still have significant lending power.

Mnuchin issued a letter Thursday saying he would not renew the Fed’s programs that used funds from the CARES Act of Congress. These programs were created in response to the financial panic that accompanied the spring lockdowns and allowed the Fed to lend up to $ 4.5 trillion in various financial markets. Mnuchin argued that it was the intention of Congress for the funds to lapse.

In an unusual statement, the Fed made its rejection of the decision public, saying: “The Federal Reserve would prefer the full range of emergency facilities put in place during the coronavirus pandemic to continue to play their vital role as backing up our still tense people and put them at risk Economy. “

However, those familiar with the decision say either Mnuchin or a new Treasury Secretary in the Biden administration could decide to revive the emergency loan programs under a new deal with the Fed. Approximately $ 25 billion of existing Treasury equity will remain with the Fed from funds under the CARES Act. In addition, the Treasury Department has approximately $ 50 billion in the Exchange Stabilization Fund. With 10 to 1 leverage – as used for the contingency programs – the Fed has around $ 750 billion in lending authority to stop markets in the event of a disruption. The approval of the Congress is not required. However, there needs to be a new agreement between the Treasury Secretary and the Federal Reserve Board of Governors.

The Fed has only borrowed about $ 25 billion so far from the programs that are being closed, making the $ 750 billion in context pretty sizeable.

From the Fed’s perspective, this is not an optimal arrangement as it would likely require a new shock to the financial system to accelerate a restart of the programs. The Fed had hoped to avoid this shock by keeping the programs in place. But the money would be there when it was needed.

The return of the unused $ 429 billion from the Fed to the General Fund creates a funded pool of cash that Congress could use to fund expanded unemployment benefits or additional small business loans or grants. There is an additional $ 135 billion in unused money already funded from the Paycheck Protection Program. A new aid package could also include new money provided by Congress, but much of that is already funded.

The biggest loser seems to be midsize companies, which appear to have only just begun borrowing from the Fed’s Main Street Lending Facility. The terms of the facility were recently changed to allow for smaller loans as low as $ 100,000. It will likely be almost reissued in a couple of weeks and can only be adjusted with the approval of the Fed and the Treasury Department.

The US Chamber of Commerce criticized Mnuchin for precisely this reason. A statement said: “A surprise termination of the Federal Reserve’s emergency liquidity programs, including the Main Street Lending program, unties the hands of in-depth administration prematurely and unnecessarily, closing the door to critical liquidity options for companies at a time when they need them them most. “

Mnuchin extended three programs that did not use CARES Act funds for 90 days, including facilities that halted commercial paper and money markets.

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