Mnuchin’s decision cuts off the federal lending authority, but sources say the emergency programs could be revived

US Treasury Secretary Stephen Mnuchin and Federal Reserve Chairman Jerome Powell share a salute before testifying before the House Financial Services Committee hearing on oversight of the Treasury Department’s response to the Coronavirus (COVID-19) pandemic on Capitol Hill in Washington, September 22, 2020.

Joshua Roberts | Pool | Reuters

Treasury Secretary Steve Mnuchin’s decision to allow several of the Federal Reserve’s emergency lending programs to expire on December 31 will significantly limit the central bank’s ability to support the financial system. But people familiar with the situation say the Fed will still have significant lending power in the event of a system shock.

Mnuchin released a letter on Thursday saying that he It will not extend the Federal Reserve programs That used Congressional money the CARES Act. Created in response to the financial panic that accompanied the spring closures, these programs have given the Fed the ability to lend as much as $ 4.5 trillion in various financial markets. Mnuchin argued it was the intention of Congress for the money to run out.

The Fed, in an unusual statement, declared its disagreement with the decision, saying: “The Fed prefers that the full suite of emergency facilities created during the coronavirus pandemic continue to serve their important role as our backstop that remains tense. And the fragile economy.” .

But people familiar with the decision say that Mnuchin or A. New Treasury Secretary from the Biden administration He could decide to revive the emergency lending programs under a new deal with the Federal Reserve. About $ 25 billion of current Treasury stock will be left in the Federal Reserve from CARES Act funds. In addition, the Treasury holds approximately $ 50 billion in the exchange stabilization fund. With 10 to 1 leverage – which is what it uses for emergency programs – the Fed will have about $ 750 billion in lending authority to support markets in the event of disruption. Congressional approval will not be required. However, there has to be a new deal between the Treasury secretary and the Federal Reserve Board of Governors.

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So far, the Fed has only loaned about $ 25 billion from programs that are shutting down, making the $ 750 billion a fairly large amount in context.

It’s not a perfect arrangement from the Fed’s point of view, as it would likely require some fresh shocks to the financial system to expedite a software restart. The Fed hoped to avoid that shock by keeping the programs in place. But the money will be there if needed.

Meanwhile, returning unused Fed $ 429 billion from the Federal Reserve to the General Fund creates an amount of money that is already being funded that Congress can decide to use to fund expanded unemployment benefits, additional loans, or grants for small businesses. An additional $ 135 billion in unused money is already funded by the Paycheck Protection Program. The new relief package could include new funds appropriated by Congress as well, but much of it is already funded.

The biggest losers appear to be the mid-sized companies that appear to be just starting to take out loans at the Fed’s Main Street Lending Facility. The terms of the facility were recently revised to allow for smaller loans of up to $ 100,000. It will likely close to new lending within two weeks and can only be reformulated by agreement between the Federal Reserve and Treasury.

The American Chamber of Commerce criticized Mnuchin for this very reason. “The sudden termination of the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, ties early and unnecessarily the hands of the incoming administration, and closes the door to important liquidity options for companies at a time when they need it most,” she said in a statement.

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Mnuchin extended three 90-day programs that did not use CARES Act money, including facilities that support commercial paper and money markets.

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