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Mnuchin Ends Some Pandemic Loan Programs Fed Deems Critical

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(Reuters) – US Treasury Secretary Steven Mnuchin said on Thursday that the Federal Reserve’s main pandemic loan programs would expire on December 31, putting the outgoing Trump administration at odds with the central bank and potentially adding stress to the economy as President-elect Joe Biden arranges his administration.

FILE PHOTO: Steven T. Mnuchin, Secretary, Department of the Treasury at the Senate Committee on Banking, Housing and Urban Affairs hearing reviewing the CARES Act Quarterly Report to Congress, in Washington, DC, U.S., on September 24, 2020. Toni L Sandys / Pool via REUTERS

In a letter to Fed Chairman Jerome Powell, Mnuchin said the $ 455 billion allocated to the Treasury under the CARES Act last spring, much of which was set aside to support Fed loans to businesses , nonprofits and local governments, should instead be available for Congress to reassign them.

The move comes as data shows the rapid recovery from a historic plunge in the economy is fading, with more than 10 million people who had jobs in January still out of work

“I demand that the Federal Reserve return the unused funds to the Treasury,” Mnuchin said in a letter to Powell, refusing to expand programs which the central bank said were essential to ensure that credit flowed to all parts of the country. economy during the worst economic times. slowdown in a century.

The announcement was not expected by Fed officials, who said this week the programs should be extended, and told Mnuchin immediately after his ruling was made public.

In an emailed statement, the Fed said it “would prefer that all of the emergency facilities put in place during the coronavirus pandemic continue to play their important role in supporting our still strained and vulnerable economy.” .

“I think given the state of the economy and there are still so many uncertainties, it’s safe to keep these things open,” Atlanta Fed Chairman Raphael Bostic said in an interview with Bloomberg Television. Bostic is on the shortlist to be Biden’s Secretary of the Treasury.

The announcement could signal potential problems for the incoming Biden administration. Although the programs were not widely used, Fed officials believed their presence reassured financial markets and investors that credit would remain available to help businesses, local agencies and even non-profit organizations. lucrative during the downturn of the pandemic.

“A surprise termination… prematurely and unnecessarily ties the hands of the incoming administration and closes the door to important liquidity options for businesses when they need it most,” said Neil Bradley, director of policy at the United States Chamber of Commerce.

“For about three weeks in January, the markets will operate without the support they have had since the spring,” JPMorgan analyst Michael Feroli said, referring to the delay between the expiration of the Fed’s programs and the inauguration of Biden, a Democrat, whose treasury secretary could reopen programs.

The announcement lowered US Treasury benchmark yields and stock index futures.

The yield on 10-year treasury bills US10YT = RR slipped 2 basis points and was the lowest in 10 days at 0.83%. Emini futures on the S&P 500 index ESv1 fell 0.7% after reopening at 6:00 p.m. EST (2300 GMT) for the overnight trading session.

Mnuchin authorized a 90-day extension to a group of other programs that provide liquidity to major financial markets, including those for short-term business credit.

But Fed officials have stressed in recent days that the wider economy has not yet come out of the woods, with the pandemic spreading, millions of unemployed and major industries suffering from downturns. depression.

In his letter to Powell, Mnuchin said that in the “unlikely event” that the lending programs were needed again, the Fed could ask the Treasury to reinstate them with funding from the Treasury’s own stability fund or with cash. new congressional money.

The programs, particularly the “Main Street” and local government landing programs, raised the possibility that trillions of dollars in central bank credit would flow into an economy that had been partially shut down in the spring of July. due to the pandemic.

As of Thursday, the Fed had only granted $ 5.4 billion in loans on Main Street, according to data released Thursday. The municipal liquidity facility had issued only about $ 1.7 billion in loans.

But the programs were seen as an important part of the pandemic response, expanded at the behest of lawmakers who wanted the central bank’s lender of last resort powers, usually limited to financial institutions, to be open to all. economy due to the dramatic impact of the pandemic. on trade.

U.S. Democratic Representative James Clyburn, chairman of the House Select Committee on the coronavirus crisis, said there was “absolutely no justification” for Mnuchin to suspend Fed lending programs amid the health crisis, and asked him to reverse the decision.

“INJECTION OF UNCERTAINTY”

Some Republicans in Congress believe it is time for the Fed to pull back, however, even with coronavirus infections at record levels and a vaccine rollout likely months later.

Pat Toomey, a Republican senator willing to lead the banking committee if Republicans hold the Senate, applauded the Treasury’s actions.

“These facilities (…) have successfully achieved their objective,” he said. “With liquidity restored, they are expected to expire, as Congress intended and the law requires, by December 31, 2020.”

Others were not convinced.

“The Fed has been one of the only sources of stability in Washington and withdrawing its latitude to offer support in a faltering recovery is just nonsense,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading , based in Washington.

“This is a painful development that injects uncertainty and instability into the markets in completely unnecessary ways. How many times will Washington stumble on its shoals in response to this crisis?

Reporting by Howard Schneider and Ann Saphir; Additional reporting by Jonnelle Marte, Pete Schroeder and Radhika Anilkumar; Editing by Cynthia Osterman and Peter Cooney