November 24, 2020

Mnuchin Plans to End Some Emergency Fed Facilities

Mr. Mnuchin did agree to extend other emergency loan programs that are not backed by the congressional appropriation, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.

The Fed avoids taking credit losses when extending loans, and throughout the pandemic crisis it has asked for Treasury backup for its riskier programs. If it returns any unused money that the Treasury has already dedicated to support the programs, as Mr. Mnuchin requested, the Biden administration will have less financial backup to restart the programs.

That’s because the congressional appropriation — $195 billion of which has been earmarked to specific Fed programs — cannot be used to make new loans after the end of the year. But while the law prohibits the Treasury from putting money into the Fed’s facilities after 2020, it does not obviously prevent the Fed from using already-earmarked Treasury funding to insure its own loans and bond purchases.

“The loans, loan guarantees and investing that the Treasury does is the applicable language,” said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania. He said that while it may be possible to read the law as preventing new Fed loans, that is not the “obvious reading.”

The Fed and the next Treasury secretary do have an alternative to continue the programs: They could use money in the Treasury’s Exchange Stabilization Fund, which still contains about $74 billion in uncommitted funds, to back the programs. It is unclear exactly how much of the fund can be used, but the programs have not to date needed substantial capacity.

Mr. Mnuchin’s move could leave the government with fewer options to help the economy just as the new administration takes office.

“Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets,” Jason Furman, a prominent Democratic economist, said on Twitter. “But what is the downside to continuing them as insurance against worse developments?”

Article source: https://www.nytimes.com/2020/11/19/business/economy/mnuchin-fed-emergency-programs.html

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