UPDATE: Nov. 23, 2020: Federal Reserve Chair Jerome Powell made it clear Friday he would honor Treasury Secretary Steven Mnuchin's request to give back unused coronavirus-related emergency lending funds.
"We will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination," Powell wrote in a letter to Mnuchin posted on the Fed's website Friday.
Mnuchin's request Thursday incited a rift between the two agencies, with Powell initially responding that the central bank "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 on Friday cited the power the legislation gives the Treasury. "The CARES Act assigns the Treasury Secretary sole authority to make certain investments in Federal Reserve emergency lending facilities, subject to limits specified in the statute," Powell wrote. "You have indicated that the limits on your authority do not permit the CARES Act facilities to make new loans or purchase new assets after December 31, 2020."
Powell noted he was aware that, to at least some extent, the $74 billion Exchange Stabilization Fund could be used to capitalize Fed lending facilities in a pinch.
- Treasury Secretary Steven Mnuchin, in a letter Thursday to Federal Reserve Chair Jerome Powell, said he would let the Main Street Lending Program and four other coronavirus-inspired aid measures expire Dec. 31, and requested the Fed return unused funds to the Treasury, allowing Congress to re-appropriate more than $450 billion.
- The letter prompted a swift rebuke from the central bank. "The Federal Reserve 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," the Fed said in a statement Thursday, according to American Banker.
- Mnuchin also sought a 90-day extension for four other emergency lending facilities, including the Paycheck Protection Program (PPP).
Mnuchin asserted in his letter the lending programs "have clearly achieved their objectives."
"Banks have the lending capacity to meet the borrowing needs of their corporate, municipal and nonprofit clients," he wrote Thursday.
But the timing of the Treasury secretary's request is notable for a number of reasons. Some analysts, executives and lawmakers, pointing to President-elect Joe Biden's presumed Jan. 20 inauguration date, are blasting the move as overtly political.
"By asking for the money back, what Mnuchin does is he makes sure it's not there for Biden's Treasury secretary," Krishna Guha, vice chairman of Evercore ISI, told The Wall Street Journal. "You're greatly reducing the firepower that's available to your successor. This is reckless politicization of market-stabilization policy."
Sen. Ron Wyden, D-OR, in a statement quoted in The Washington Post, called the move "economic sabotage."
Beyond that, the request comes at a time when the coronavirus caseload is ramping up again, prompting concern that the money, if the Fed gives it back, won't be available for borrowers that need it if the economy falters.
"It adds insult to injury to an economy that is about to be flooded by the surge in Covid cases, hospitalizations and deaths," Diane Swonk, chief economist at Grant Thornton, told Bloomberg. "If anything, Treasury should be shoring up the storm wall of these facilities."
Fed officials may have been caught off guard by Thursday's request. Powell indicated Tuesday he didn't think the programs had yet run their course. "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, according to Bloomberg.
Some of the facilities Mnuchin suggested closing have been underused. Of the $600 billion made available in the Main Street Lending Program, the Fed has made $5.4 billion in loans, Reuters reported, citing data released Thursday. Similarly, the Fed vowed to buy up to $750 billion in large companies' debt that had been rated investment-grade, but it has bought about $13.5 billion, The Wall Street Journal reported.
However, Bryan Whalen, a portfolio manager with TCW, told the Financial Times the point was not how well-used the programs were but the confidence boost they gave markets early on.
"The bonds that were bought or loans that were made in and of itself, weren't meaningful," he said. "But collectively when you look at … the amount of sectors they were touching, collectively it meant so much."
Mnuchin indicated in his letter that the under-use was a sign of success — that borrowers could go elsewhere for the money — and that the plan all along was to wind down the programs at the end of the year.
"I was personally involved in drafting the relevant part of the legislation and believe the congressional intent ... was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020," Mnuchin said.
Sen. Pat Toomey, R-PA, who would likely become Senate Banking Committee chair if Republicans retain Senate control after a pair of January run-off Senate elections in Georgia, backed up that assertion.
"These temporary facilities helped to both normalize markets and produce record levels of liquidity," Toomey said in a statement, according to The New York Times. "Congress's intent was clear: These facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020."
Congressional appropriation can't be used to make new loans after the end of the year. But although the law prohibits the Treasury from putting money into the Fed's facilities after 2020, it does not keep the Fed from using already-earmarked Treasury funds. About $195 billion of the $454 billion allotted from the Treasury Department under the CARES Act has already been specifically designated to cover any losses the Fed might take through its programs, including through loans that companies fail to repay.
The remaining $259 billion, as of last month, has not been committed to any specific Fed programs, The Washington Post reported.
The Treasury doesn't have the power to take back the money outright — hence, Mnuchin used the language "request." The Fed's emergency lending powers, however, also dictate Powell would need Mnuchin's signoff to make major changes to the programs' terms. Extending the end date would be one of them.
Mnuchin, in his Thursday letter, said the Fed could seek the Treasury's approval to resume lending in the programs that will expire "in the unlikely event that it becomes necessary."
Some Democrats have suggested the Fed should refuse to return the money.
Bharat Ramamurti, a Democrat who sits on the COVID-19 Congressional Oversight Commission, tweeted that, legally, the Fed was not obligated to give the funds back.
"Under its contracts with Treasury, the Fed can and should reject the request," he said. "While Secretary Mnuchin claims congressional intent was to halt all new loans at year-end, the text of the CARES Act doesn't say that. At a minimum, the Fed can continue to make loans using the $195 billion in equity Treasury has already committed."
The Fed and the next Treasury secretary can take an alternate route, The New York Times reported. They could use the Treasury's Exchange Stabilization Fund, which has about $74 billion in uncommitted funds, to back the programs. It is unclear exactly how much of the fund can be used, the publication wrote.
But some analysts are showing concern for the period between the end of the year and when the Biden administration begins.
"For about three weeks in January, the markets will be operating without the backstop they've had since the spring," JPMorgan analyst Michael Feroli, told Reuters.
"This seems extremely dangerous," David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy, told the Financial Times, "like telling the firehouse we're cutting off the water between now and inauguration, and hope we don't have any fire."