Mnuchin decision cuts Fed lending power, but s say emergency programs can be revived

US Treasury Secretary Steven Menuchin and Federal Reserve Chairman Jerome Powell had an elbow before the Treasury Department and the Federal Reserve’s Coronovirus Disease (COIDID-19) testified before the House Financial Services Committee on the response to the epidemic on Capitol Hill in Washington. Greeted shared. September 22, 2020.

Joshua Roberts | Pool | Reuters

Treasury Secretary Steve Mnuchin’s decision to allow the Fed to end several 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 that the Fed will still have considerable lending power in the event of a setback to the system.

Mnuchin released a letter on Thursday stating that he would not expand the Fed’s programs in which the Congress’ Cars Act fund was used. 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 decision, stating, “The Federal Reserve would prefer that the full suite of emergency facilities installed during the coronovirus epidemic continue to play an important role as our still stems. And weak Economy. “

But people familiar with the decision say that under a new agreement with the Fed, a new Treasury secretary in the Menchin or Biden administration could decide to revive emergency lending programs. Approximately $ 25 billion of the existing equity from the Treasury will be released from the CARES Act funds to the Fed. In addition, the Treasury has $ 50 billion in exchange stabilization funds. Using 10-to-1 leverage – which is used for emergency programs – the Fed will have the authority to loan approximately $ 750 billion in the event of disruption. 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 has so far borrowed only about $ 25 billion from programs that are being closed, making $ 750 billion of considerable value in the context.

This is not an optimal arrangement 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.

Meanwhile, returning unused $ 429 billion from the Fed to the General Fund creates a money that is already funded that Congress may decide to use for extended unemployment benefits or 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 disadvantage appears to be mid-sized businesses that start taking loans at 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 Mnuchin for that reason. It said in a statement, “A surprising end to the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, involves the administration’s hands coming prematurely and unnecessarily, and significant liquidity options for businesses at a time But she closes the door when she needs 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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