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Fed officials call for keeping emergency loans available past Mnuchin's Dec. 31 expiry date

Brian Cheung
·3 min read

The Federal Reserve has obliged to Treasury Secretary Steven Mnuchin’s orders to wind down most of its emergency loan facilities at year-end, but Fed officials are publicly saying they would have preferred to keep them open.

The advocacy within the Fed puts some pressure on the incoming Biden administration to figure out a legal approach to reopening the so-called liquidity facilities, designed to backstop markets ranging from corporate debt to municipal bonds.

“We would want to leave that backstopping function in place for some additional period of time, but not forever,” Fed Chairman Jerome Powell told the House Financial Services Committee on Wednesday.

On November 20, Mnuchin ordered the Fed to allow nine of its 13 facilities to wind down on December 31, in addition to returning about $429 billion in unused Coronavirus Aid, Relief, and Economic Security (CARES) Act funds allocated to the Fed from the Treasury.

Although the Fed countered that the “still-strained and vulnerable economy” warranted keeping the facilities open, Powell acknowledged that the Treasury has the authority to interpret the usage of CARES Act funding.

The Fed chief told Congress Wednesday that the central bank accepts Mnuchin’s role as the interpreter of how the CARES Act money should be used. But Powell did not offer an opinion on whether or not he agrees with that interpretation.

Federal Reserve Chair Jerome Powell prepares to testify before a House Financial Services Committee hearing on Capitol Hill in Washington, Wednesday, Dec. 2, 2020. (Jim Lo Scalzo/Pool via AP)
Federal Reserve Chair Jerome Powell prepares to testify before a House Financial Services Committee hearing on Capitol Hill in Washington, Wednesday, Dec. 2, 2020. (Jim Lo Scalzo/Pool via AP)

That leaves some room for the next Treasury Secretary to offer a new interpretation, although it is unclear if a Treasury Secretary Janet Yellen (pending Senate confirmation) would want to wage such a political battle with Republicans that presided over the CARES Act’s creation.

Mnuchin said Wednesday that he has spoken with Yellen about the expiry of the Fed programs, noting that she “didn’t reflect an interpretation [of the CARES Act] one way or another.”

Keeping the insurance

Other Fed officials said this week that packing up the market backstops are not helpful to an economy still slogging through a recovery. COVID-19 cases continue to break through new records as new cases tilt up in nearly every corner of the country.

On Tuesday, San Francisco Fed President Mary Daly told reporters that she would have liked “to see the full range of liquidity facilities extended until we find the virus is nearly or fully behind us."

Dallas Fed President Robert Kaplan similarly told the Wall Street Journal that he would have advocated for extending the facilities, which were “intended to be insurance.”

The stakes remain high for state and local governments struggling to plug revenue shortfalls in addition to small- and medium-sized businesses facing the new shutdown restrictions.

New Jersey, for example, saw a 5.2% decline in revenues in the January to October period of 2020 compared to the same period last year, according to the New York Fed. New York City, whose public transit network may tap the Fed’s Municipal Liquidity Facility (MLF) for help twice, saw a 4.0% decline.

New York Fed President John Williams told reporters Wednesday that the MLF, despite low uptake, is the reason why municipalities around the country have been able to “fund themselves at historically low cost.”

Williams also expressed worry about small businesses that may struggle to get through the next six months. The Fed’s Main Street Lending Facility, which also had relatively low uptake, sought to offer loans to small- and medium-sized businesses.

Both facilities, the Main Street Lending Facilities in addition to the MLF, are among the nine set to expire December 31.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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