Mnuchin is attending to grips with some pandemic mortgage packages that the Fed believes are important
© Reuters. FILE PHOTO: Senate Banking, Housing and Urban Affairs Committee hearing
By Howard Schneider and Ann Saphir
(Reuters) – US Treasury Secretary Steven Mnuchin said Thursday that the Federal Reserve's major pandemic loan programs would expire on December 31, which would bring the outgoing Trump administration into conflict with the central bank and potentially weigh on the economy as president-elect Joe Biden organizes its administration.
In a letter to Fed Chairman Jerome Powell, Mnuchin said the $ 455 billion allocated to the Treasury Department under the CARES bill last spring, much of it in support of Fed loans to corporate, nonprofit organizations and local governments should instead be available to Congress for redistribution.
"I urge the Federal Reserve to return the unused funds to the Treasury Department," Mnuchin said in a letter to Powell, declining to extend programs that the central bank said it used to ensure the flow of credit to all parts The economy is crucial during the worst economic downturn in a century.
The announcement was not expected by Fed officials, who said this week the programs should be extended and told Mnuchin so immediately after its decision was published.
In a statement emailed, the Fed said it would prefer if the full range of emergency facilities put in place during the coronavirus pandemic continued to play their vital role as a setback to our still strained and fragile economy.
"I think, given the economic climate and the great uncertainty, it's wise to keep these things open," said Atlanta Fed President Raphael Bostic in an interview with Bloomberg Television. Bostic is shortlisted to become Biden's Minister of Finance.
The announcement could signal potential problems for in-depth Biden administration. Although the programs were not being widely used, Fed officials felt their presence reassured financial markets and investors that credit would continue to be available to help businesses, local agencies and even nonprofits in easing the pandemic help.
The announcement caused US Treasury bond yields and stock index futures to decline.
The 10-year Treasury note yield fell 2 basis points, its lowest in 10 days at 0.83%. Emini futures fell 0.7% after reopening at 6:00 p.m. EST (2300 GMT) for the overnight trading session.
Mnuchin allowed a 90-day extension to a group of other programs providing cash to the major financial markets, including those for short-term corporate loans.
But Fed officials have stressed in recent days that the broad economy is not out of the woods yet as the pandemic spreads, millions of unemployed people and major industries plague the depression.
In his letter to Powell, Mnuchin said that in the "unlikely event" that the loan programs were needed again, the Fed could ask the Treasury Department to restore them using funds from the Treasury Department's own Stability Fund or new congressional funds.
The programs, particularly the Main Street and local government landing programs, have raised the prospect of a trillion dollar flood of central bank loans into an economy that was partially closed this spring due to the pandemic.
As of Thursday, the Fed had made only $ 5.4 billion in Main Street loans, according to data released Thursday. The municipal liquidity facility had only issued loans of around $ 1.7 billion.
However, the programs were seen as an important element of the pandemic response, which was expanded at the behest of lawmakers who wanted the central bank's powers of last resort, normally limited to financial institutions, due to the dramatic impact the pandemic had on the entire economy will be opened to trade.
Some Republicans in Congress now felt it was time for the Fed to back out, even if coronavirus infections were at record levels and a vaccine was likely to be deployed in the next few months.
Pat Toomey, a Republican senator ready to chair the banking committee that runs the Fed overseas if the Republicans hold the Senate, applauded the Treasury Department's actions.
"These facilities … have successfully achieved their intended purpose," he said. "Once liquidity is restored, it should expire by December 31, 2020 as intended by Congress and required by law."
Others weren't convinced.
"The Fed has been one of the few sources of stability in Washington, and there is no point in losing its margin to offer support for a shaky recovery," said Isaac Boltansky, director of policy research at Compass Point Research & Trading in Washington.
"This is a worrying development that is adding unnecessary uncertainty and instability to markets. How many times will Washington trip on its shoelaces in response to this crisis?"