Mnuchin cuts Fed power, but sources say emergency programs could be revived

Treasury Secretary Steve Mnuchin’s decision to allow the Fed to end several of its emergency lending programs on December 31 would dramatically reduce the ability of the central bank to backstop the financial system.

But people familiar with the situation say the Fed will still have considerable lending power in the event of a setback to the system.

Mnuchin announced on Thursday that he would not pursue the Fed’s programs that used Congress’ CARES Act funds. Created in response to the financial panic with the lockdown in spring, those programs gave the Fed the ability to lend up to $ 4.5 trillion to various financial markets. Mnuchin argued that it was the intention of Congress to liquidate the funds.

In an unusual statement, the Fed made public its disagreement with the Mnuchin decision, saying, “The Federal Reserve would prefer that the full suite of emergency facilities installed during the coronovirus epidemic still play an important role for us. And a weaker economy.”

But people familiar with the decision say that Biden may decide to revive emergency lending programs under a new agreement with the administration’s Mnuchin or the new Treasury Secretary the Fed.

The current $ 25 billion from the Treasury will be left to the Fed from CARES Act funds. In addition, the Treasury has approximately $ 50 billion in exchange stabilization funds. Using 10-to-1 leverage – which it is used for emergency programs – in the event of disruption the Fed will have a lending authority of about $ 750 billion to backstop the markets.

Congressional approval will not be required. However, there should be a new agreement between the Treasury Secretary and the Federal Reserve Board of Governors.

The Fed, so far, has only taken a loan of about $ 25 billion from programs that are being closed, making $ 750 billion of considerable value in the context.

This is not an optimal mechanism from the Fed’s point of view, as it would require some new setbacks to the financial system to resume programs. The Fed hoped to avoid that setback by keeping the programs in place. But if needed, the money will be there.

Returning the unused $ 429 billion from the Fed to the General Fund becomes already funded funds that Congress may decide to use extended unemployment benefits or provide additional loans or grants to small businesses. There is already $ 135 billion of unused funds from the paycheck protection program. A new relief package could include new funding appropriated by Congress, but a large part of it is already funded.

The biggest losers are businesses that have started taking loans in the Fed’s Main Street Lending Facility. Terms for the facility were recently revised to allow for small loans of $ 100,000. It will be close to granting new loans in a few weeks and can only be reinstated with an agreement between the Fed and the Treasury.

The US Chamber of Commerce criticized Manuchin for that reason, stating: “An astonishing end to the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, in the hands of premature and unnecessarily incoming administrations” Binds, and closes critical doors. Liquidity options for businesses when they need them most. “

Mnuchin expanded three 90-day programs that did not use CARES Act funds, including commercial paper and facilities that closed the money market.

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