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Mnuchin is pulling some pandemic programs that the Fed considers essential

(Reuters) – US Treasury Secretary Stephen Mnuchin said on Thursday that key Federal Reserve lending programs would expire on December 31, putting the outgoing Trump administration at odds with the central bank and potentially adding stress to the economy as President-elect Joe Biden organized his administration.

PHOTO: Stephen T. Mnuchin, Secretary, Treasury, during the Senate Banking, Housing and Urban Affairs Committee hearing on the quarterly report on the Congressional Care Act, in Washington, DC, USA, September 24, 2020 Tony L. Sandys / Pool via REUTERS

In a letter to Federal Reserve Chairman Jerome Powell Mnuchin, he said $ 455 billion was allocated to the Treasury Department under the Care Act last spring, much of which was set aside to support lending by the Fed to nonprofit businesses. and local authorities should instead be available to Congress for redistribution.

The decision comes as data show that the early rapid recovery from the historic economic downturn is fading, with more than 1

0 million who had jobs in January still out of work.

“I want the Federal Reserve to return unused funds to the Treasury,” Mnuchin said in a letter to Powell, declining to expand programs that the central bank said were crucial to ensuring credit flow in all parts of the economy during the -the worst economic situation decline in a century.

The announcement was not expected from Fed officials, who had said this week that the programs should be extended and told Mnuchin as soon as his decision was made public.

In an email, the Federal Reserve said it would “prefer the full range of emergency facilities created during the coronavirus pandemic to continue to play an important role in supporting our still tense and vulnerable economy.”

“I think given the economy and there’s still so much uncertainty, it’s reasonable to keep these things open,” Atlanta Fed President Rafael Bostic told Bloomberg television. Bostic is on the shortlist to be secretary of Biden’s finance ministry.

The message could signal potential problems for Biden’s incoming administration. Although the programs were not widely used, Fed officials felt their presence reassured financial markets and investors that credit would remain available to help businesses, local agencies and even nonprofits in the face of a pandemic decline. .

“A surprise termination … prematurely and unnecessarily binds the hands of the incoming administration and closes the door on important liquidity options for businesses when they need them most,” said Neil Bradley, chief political officer of the American Chamber of Commerce.

“For about three weeks in January, the markets will run without the reversal they have since spring,” said JPMorgan analyst Michael Ferroli, referring to the time between the expiration of Fed programs and the inauguration of Biden, a Democrat whose finance minister could to reopen programs.

The announcement sent reference yields to the US Treasury Department and stock index futures lower.

The profitability of the 10-year treasure note US10YT = RR slipped 2 basis points and was the lowest in 10 days of 0.83%. Emini S&P 500 futures with index ESv1 fell 0.7% after reopening at 18:00 EST (2300 GMT) for the overnight trading session.

Mnuchin has authorized a 90-day extension of a group of other programs that supply cash to major financial markets, including those for short-term corporate credit.

But Fed officials have stressed in recent days that the broad economy has not yet emerged from the forest, with the spread of the pandemic, millions of unemployed and important business sectors suffering from downturns.

In a letter to Powell, Mnuchin said that in the “unlikely” case, lending programs are needed again, the Fed may ask the Treasury to reimburse them with funding from the Treasury’s own stability fund or with new money from Congress.

Programs, particularly Main Street and local government landing programs, raised the prospect of trillions of dollars in central bank loans, which flooded an economy that was partially halted in the spring due to the pandemic.

As of Thursday, the Fed had lent only $ 5.4 billion to Maine Street, according to data released Thursday. The municipal liquidity facility has provided only about $ 1.7 billion in loans.

But the programs were seen as an important element of the pandemic response, extended by order of lawmakers who wanted the central bank’s power to lend finite funds, usually limited to financial institutions, to the whole economy because of the pandemic’s dramatic impact on trade.

US Democratic spokesman James Cliburn, chairman of the Coronavirus Crisis Committee’s selection committee, said there was “absolutely no excuse” for Mnuchin to postpone the Fed’s credit programs amid the health crisis, and asked him to overturn the decision.


However, some Republicans in Congress believe it is time for the Fed to cut back, even with coronavirus infections at record levels and the deployment of a vaccine probably months off.

Pat Toomey, a Republican senator ready to lead the Banking Committee if Republicans hold the Senate, applauded the treasury.

“These facilities … have successfully achieved their purpose,” he said. “With the recovery of liquidity, they must expire, as provided by Congress and by law, by December 31, 2020.”

Others were not convinced.

“The Federal Reserve is the only source of stability in Washington, and removing its freedom to offer support for a shaky recovery is simply pointless,” said Isaac Boltanski, director of policy research at Washington-based Compass Point Research & Trading.

“This is a worrying development that is completely unnecessarily creating uncertainty and instability in the markets. How many times will Washington stumble upon its ties in response to this crisis? “

Report by Howard Schneider and Anne Sapphire; Additional reports by Jonnelle Marte, Pete Schroeder and Radhika Anilkumar; Edited by Cynthia Osterman and Peter Cooney

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