US Treasury Secretary Steven Mnuchin has pulled the plug on emergency Federal Reserve lending programs, drawing a rare rebuke from the central bank, which said they are needed to support the economy as the coronavirus pandemic continues to rage.
In a letter sent Thursday to Fed Chairman Jerome Powell, Mnuchin asked the central bank to return some $455 billion in unused funding for programs set to expire December 31. He added that Congress would then be able to use the money for other purposes.
The decision would force several programs to end that were intended to help businesses that have been struggling as the pandemic wreaks havoc on the US economy. The money was set aside in March as part of the CARES Act, a $2 trillion stimulus package meant to prop up the ailing economy by providing financial assistance and loans for distressed companies, among other measures.
The Fed programs “have clearly achieved their objective,” Mnuchin wrote. “Markets responded positively, spreads tightened, and banks continued lending.”
But the central bank immediately criticized the decision. The Fed, which typically avoids commenting on sensitive political issues, responded in a statement saying that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
Powell said earlier this week that it was too soon to wind down the lending programs. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away,” he said during an event on Tuesday.
Mnuchin defended his decision on CNBC Friday morning, saying it was not political and that he is merely following the intent of the law.
“Markets should be very comfortable that we have plenty of capacity left.” he said. “To the extent these need to be reactivated, we have over $800 billion of capacity so I consider that to be a pretty good bazooka.”
The move puts the Trump administration at odds with Corporate America. The US Chamber of Commerce blasted the decision as one that “closes the door on important liquidity options for businesses at a time when they need them most,” adding that it “unnecessarily ties the hands of the incoming administration.”
US stocks opened slightly lower Friday, showed little reaction to the squabbling between the Treasury and Fed. One reason may have been because investors are confident the incoming Biden administration will unleash more stimulus to help boost the economy.
Mnuchin wrote in his letter that in the “unlikely event” that the programs need to be re-established in the future, the Fed can request approval from the Treasury secretary again.
In a statement, US Chamber of Commerce Executive Vice President and Chief Policy Officer Neil Bradley said that businesses “need the government’s full support by providing the resources necessary for broad-based economic recovery.”
Bradley singled out the Main Street Lending program, which was designed to support small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the pandemic.
Bradley said the Chamber urges “these programs be extended for the foreseeable future and call[s] on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer.”
Mnuchin’s move received support, though, among political allies. Republican Sen. Mike Crapo, chairman of the US Senate Committee on Banking, lauded the decision.
Returning the unused money “allows those funds to be re-appropriated for other uses, such as reducing our national debt, or providing additional targeted relief to sectors of the economy most in need,” Crapo said in a statement.
Jaret Seiberg, an analyst at Cowen, said Mnuchin’s decision “seems political.”
“This appears to be a political move by Team Trump to limit what President-elect Joe Biden can do next year to boost the economy, especially if Congress fails to pass a big stimulus,” he wrote in a research note Thursday. He added, though, that there may be a way for the programs to continue.
“Treasury can refuse to commit new capital, but we don’t see how it can recall capital already committed,” Seiberg wrote. “That suggests these programs will remain open beyond Dec. 31, which is positive for cash-strapped small businesses and local governments.”
Meanwhile, US lawmakers have failed to reach an agreement on a second economic stimulus package, despite months of negotiations. Talks between Mnuchin and House Speaker Nancy Pelosi sputtered before the election earlier this month.