CARES Act Funding to Expire
The Treasury will let a number of the Federal Reserve’s emergency lending programs end by December 31, which is likely to limit the central bank’s power to support the funding system. In the official letter published on Thursday, Mnuchin said he plans to let the central bank’s programs that used CARES Act funds expire.
“I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds,” said Secretary Steven Mnuchin in a letter sent to the Fed Chair Jerome Powell.
These programs were set up to ease the pressure that followed after the coronavirus outbreak in the spring, and it allowed the Federal Reserve to lend up to $4.5 trillion into different financial markets. Until now, the bank has lent only around $25 billion from the programs that will expire.
Still, by returning the spare $429 billion to the General Fund sets up a pool of money that’s already financed that Congress might use and invest in extending the unemployment benefits, additional loans, or grants to smaller companies.
“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,” it is said in Fed’s statement.
However, Mnuchin is adamant that this is not a political issue.
"This was a very simple thing. We're following the intent of Congress," Mnuchin told CNBC.
Some market analysts don't see this decision as a big issue as the Fed will retain a significant part of the lending control. It is estimated that the central bank will control around $750 billion of lending power to inject into markets if required, without needing approval from Congress.
“Investors have banked on the MLF (Municipal Liquidity Facility) being a reliable, emergency lender to our (municipal bond) market’s core borrowers. It has taken the idea of a payment default or catastrophic budget problem off the table,” said Matt Fabian, partner at Municipal Market Analytics at Westport.
“Without the MLF, the market won’t collapse, but it will lack some resilience if its tested by a selloff or more pronounced credit fears.”
There’s a possibility that a new agreement between the Treasury secretary and Fed governors will be reached.
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Talks to Continue on New Stimulus Plan
Mitch McConnell, the Senate majority leader, said he will continue the negotiations with Democrats over a new coronavirus stimulus bill due to the resurgence in infections in the US.
“Last night, they’ve agreed to sit down and the staffs are going to sit down today or tomorrow to try to begin to see if we can get a real good [COVID] relief bill,” Senator Chuck Schumer said in a press conference.
“So there’s been a little bit of a breakthrough in that McConnell’s folks are finally sitting down and talking to us.”
According to Mnuchin, he is expected to meet senior GOP lawmakers in a bid to draft a new targeted relief package and meet with Democrats in the coming weeks to discuss the new proposal.
Democrats and Republicans are holding discussions over government funding to prevent a government shutdown on December 11. The two sides have reached a deadlock regarding the details of a new relief bill even before the recent presidential election took place.
Several months have passed since Congress has passed the relief bill to ease the effects of the coronavirus pandemic. Furthermore, the Senate adjourned on November 18 due to the Thanksgiving holiday, almost with no signs of progress on striking an agreement.
Treasury Secretary Steven Mnuchin decided not to extend several of the Federal Reserve’s lending programs at the year’s end, a move that will likely limit the Fed’s power to support businesses and markets. However, the central bank is still expected to have plenty of firing power.