Mnuchin-Powell Split Shows Rare Discord as Economy Struggles

The top two U.S. economic policymakers have parted ways over whether to preserve emergency lending facilities designed to shore up the economy — a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by a surge in coronavirus cases.

The disagreement erupted late Thursday, touched off when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell calling for the return of funding for several Fed lending programs that rely on Treasury’s backing. Minutes later, the central bank issued its own statement urging that “the full suite” of facilities be kept in place.

Investor reaction to the split was swift: futures on the S&P 500 Index slumped 0.9% in early Friday trading in Asia, with haven demand sending Treasuries higher and pulling down yields.

Treasury chiefs and Fed chairs typically coordinate closely at times of crisis, appearing jointly before Congress and working in lockstep to ensure funding markets run smoothly. The two agencies were tightly linked in the bailouts of the financial and auto industry more than a decade ago. And they became tied statutorily in the March 2020 Cares Act economic rescue package, which appropriated money for the Treasury to support Fed backstops for everything from municipal to corporate finance.

“This is a significant and disturbing breach at a critical time for the economy,” said Tony Fratto, who worked at the Treasury Department during the George W. Bush administration. “We need all the arms of government working together and instead we’re seeing a complete breakdown,” he said, noting that Washington remains at an impasse on fiscal stimulus as well.

Underscoring the success of the programs the Fed established, Mnuchin argued that some can be allowed to stop buying new assets at the end of next month. He asked that others be kept in place for an additional 90 days.

ProgramRequested Expiration
Primary Market Corporate Credit FacilityDec. 31
Secondary Market Corporate Credit FacilityDec. 31
Municipal Liquidity FacilityDec. 31
Main Street Lending ProgramDec. 31
Term Asset-Backed Securities Loan FacilityDec. 31
Commercial Paper Funding FacilityAdditional 90 days
Money Market Mutal Fund Liquidity FacilityAdditional 90 days
Primary Dealer Credit FacilityAdditional 90 days
Paycheck Protection Program Liquidity FacilityAdditional 90 days

“Financial conditions are quite strong,” Mnuchin said in an interview. “The good news is, the markets have recovered significantly,” he said. Companies don’t need more loans, and instead require more grant money, which requires action from Congress, he said.

Mnuchin said that the purpose of his announcement was not to put the Treasury against the Fed, and that he was merely carrying out the law prescribed by the Cares Act. The facilities could be re-activated if needed with either congressional support or with other funds available to the Treasury, he said.

“It appears the Fed may be reading the legislation differently” given its statement Thursday evening, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

Read More: Mnuchin Wants $580 Billion Injected Into Slowing U.S. Economy

The risk is that the discord between the key economic players undermines confidence at a time when growth is flagging. Federal Reserve Bank of Dallas President Robert Kaplan said on Bloomberg TV Thursday that there’s the potential for gross domestic product to shrink this quarter and even next.

The economy is also set to go without fiscal stimulus: Republicans and Democrats remaindeadlocked on a new package, and measures including extended unemployment benefits are set to expire next month.

“I was a bit surprised” at the Treasury’s statement, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a Bloomberg TV interview. “Given where the economy is — and there’s so much uncertainty still out there — it’s prudent to keep those things open so that when people, if they do have stress, they can draw upon it.”

Read More: Year-End Fiscal Cliffs Are Approaching for Millions of Americans

Among the initiatives that will now no longer be able to extend new credit are two Fed facilities that allowed it to buy corporate bonds for the first time. They helped to unfreeze that market, even before the effort was up and running, and businesses have since logged record amounts of debt issuance.

Another, the Main Street Lending Program, has had a slow start, and the Fed recently loosened its terms to help encourage banks and smaller businesses to participate.

Powell himself said at a virtual conference on Tuesday that the time to discontinue the lending facilities was “not soon,” highlighting that typically the central bank keeps its backstops in place for some time after a crisis hits. He has repeatedly praised the Cares Act for what he’s described as “essential” support amid the historic collapse in GDP in the spring.

The U.S. Chamber of Commerce called for a reconsideration of Mnuchin’s decision.

“We strongly urge these programs be extended for the foreseeable future and call on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer,” the chamber said in a statement.

The sun-setting of some of the facilities will now build expectations for the Fed to take some other policy action at next month’s meeting, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.

“The market will now speculate the Fed may have to increase Treasury purchases and/or extend maturities” of the securities it buys through its main asset-purchase program, Emons wrote in a note. The next Fed policy decision is scheduled for Dec. 16.

President-elect Joe Biden’s administration could seek to renew the facilities, or press Congress to authorize fresh funding for them, when it takes office in January. Biden said Thursday that he’s made a decision on who he will nominate as Treasury secretary.

Biden’s Treasury could agree to restart the facilities, as Mnuchin pointed to, using the Exchange Stabilization Fund. But meantime, markets may need to contend with going “without a net” for several weeks, Feroli wrote in a note.

“For about three weeks in January the markets will be operating without the backstop they’ve had since the spring,” Feroli wrote.

— With assistance by Kathleen Hays

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