Wind-Down of Loan Programs Seen Raising Odds of More Fed Action

The U.S. Treasury Department’s request that the Federal Reserve wind down several emergency lending programs at the end of the year has given the central bank another reason to consider consider providing more support the economy in other forms.

Without the facilities in place, Fed officials may take the view that downside risks to the economic outlook are higher, especially amid a stalemate in Congress over additional fiscal relief and worsening Covid-19 outbreaks. That would add to a debate about whether to make changes to the central bank’s large-scale bond-buying program that Fed watchers were already expecting to be the focus of their Dec. 15-16 policy meeting.

Several Wall Street analysts had already seen rising odds of the Fed making such changes in December and indicated Friday that the Treasury’s request only bolstered the case.

“If the Fed gives back the facilities funds to the Treasury, the argument for doing more would be even stronger,” Roberto Perli, a partner at Cornerstone Macro in Washington and former Fed economist, said in a note to clients. “But it also depends on financial conditions and the outlook a few weeks from now.”

Treasury Secretary Steven Mnuchin on Thursday requested the Fed return unused money earmarked for the facilities so Congress can reauthorize it to be spent on other fiscal aid. He extended several of the Fed’s programs but said five should sunset at the end of the year on schedule. The Fed quickly responded that it would prefer all of the programs continue.

The loan programs, which the Fed began rolling out in the spring in response to the pandemic, have provided a backstop for companies and state and local governments unable to obtain financing from the private sector. Easy financial conditions have prevented them from making many actual loans, though Fed officials believe the solid financing environment is partly because of the support the facilities give.

At their last meeting on Nov. 4-5, Fed officials had what Chair Jerome Powell called “quite a useful discussion” about options for modifying the bond-buying program that’s been in place since March and propelled the central bank’s balance sheet to $7 trillion. Minutes of that meeting, which the Fed will publish Wednesday, will show the extent to which a consensus was building among officials that a change would be needed soon.

Purchase Pace

Right now, the Fed is buying $120 billion of U.S. government and mortgage-backed securities per month, with purchases spread out evenly across the spectrum of shorter to longer-dated debt. Policy makers have said they could up the pace of buying if they felt changes were necessary, or keep it steady while concentrating purchases more toward longer-term notes to put more downward pressure on interest rates. Perli sees a change in composition as more likely than an outright increase.

But so far, Fed officials themselves have been noncommittal. Chicago Fed President Charles Evans told CNBC on Friday that Treasury’s stance on the lending facilities was “disappointing,” though he added it may be too soon for the central bank to modify its asset-purchase program.

“We are in a pretty good place at the moment to sort of see how everything is going to play out,” Evans said. “I’m really looking at sort of the spring for when we have a better assessment of the labor-market dynamics and the momentum that we are going to see, or if there is really a need for more.”

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