- Treasury Secretary Steven Mnuchin says several Federal Reserve emergency lending facilities won’t be extended beyond the end of the year
- Facilities were established at the beginning of the COVID-19 pandemic to calm markets, but Mnuchin and others say they have been little used and served their purpose
- In rare public disagreement, Federal Reserve disagrees with the decision and points to ongoing economic uncertainty as a sign the facilities might still be needed
Five emergency lending facilities under the administration of the Federal Reserve won’t be extended beyond the end of the year, Treasury Secretary Steven Mnuchin announced on Thursday. Mnuchin also asked for the Fed to return $455 billion in unused funds to the Treasury to potentially be appropriated for other purposes.
The request produced a rare public disagreement between the two financial agencies. Fed Chairman Jerome Powell responded that he would prefer that the facilities remain in place in order to “continue to serve their important role as a backstop for our still-strained and vulnerable economy.” He pointed to factors such as a sharp increase in COVID-19 infections and data suggesting a weakening economic recovery as signs that there may be a more pressing need for the facilities in the coming months.
Under the CARES Act, $500 billion was appropriated to the Fed to establish a suite of emergency lending programs to help calm the markets during the COVID-19 pandemic. But the facilities were designed as backup options and were ultimately seldom used, with the Fed using just $25 billion. The funds Mnuchin has asked to be returned to the Treasury include $429 billion in excess Treasury funds and $26 billion in unused Treasury direct loan funds.
The facilities that will expire include entities to buy municipal and corporate debt as well as the Main Street Lending Program. While the latter facility was set up to provide loans to small and medium-sized businesses, it was heavily criticized for its failure to appeal to lenders and borrowers alike. Although the Main Street Lending Program has a $600 billion lending capacity, it had disbursed only about $4 billion as of early November.
In his letter to the Fed, Mnuchin said they while some sectors are “still severely impacted and in need of additional fiscal support,” he felt the economy has improved to the point where the emergency lending facilities are no longer necessary. He suggested that the Fed can rely on other available funds or a new congressional appropriation in the “unlikely event” that the facilities need to be reestablished.
Mnuchin granted a 90-day extension to four other facilities that did not use funds from the CARES Act appropriation. These include programs to support short-term business lending and banks that loaned money through the Paycheck Protection Program.
Critics charge that the decision could create economic instability and undercut the incoming Biden Administration’s efforts to address the economic impact of the COVID-19 pandemic. Bharat Ramamurti, a member of the Congressional Oversight Commission, urged the Fed to retain $195 billion in funds already committed by the Treasury even if the facilities are shut down.
