Treasury Secretary Steven Mnuchin broke sharply with the Federal Reserve this week, choosing to end a variety of programs aimed at helping markets, businesses and municipalities weather the pandemic and asking the central bank to return the funds earmarked to support those efforts.Mr.
Mnuchin said his decision was driven by a deference to what he believed was Congress’s intent when it allocated the funding, a desire to repurpose the money toward better uses and a belief that markets no longer needed them. But his actions, which will limit the incoming Biden administration’s ability to use those programs at scale, seem driven by politics.
By ending the programs — which have been funneling loans to medium-sized businesses and backstopping municipal and corporate bond markets — Mr. Mnuchin is taking away a source of economic support just as the new administration comes into office and as rising virus cases dog the recovery. By asking the Fed to return the money that enables the emergency efforts, he could make it harder for Democrats to restart them at a large scale and on more generous terms.
Mnuchin said the programs are no longer needed, but the move goes against the Fed’s desire to keep them going, according to a statement from the central bank, in a rare show of public disagreement between the two government agencies.
In a letter to Fed Chair Jerome Powell, Mnuchin described the lending facilities as successful, saying their joint efforts had boosted the ability of large corporations and state and local governments, as well as consumers, to borrow money at reasonable rates from private markets, without needing to turn to the central bank. “While portions of the economy are still severely impacted and in need of additional fiscal support, financial conditions have responded and the use of these facilities has been limited,” Mnuchin said.
A Treasury secretary appointed by President-elect Joe Biden would be able to reauthorize the programs upon taking office, but that wouldn’t be until late January at the earliest. It is unclear whether this move will increase pressure on Congress to provide more economic relief.
Former Goldman Sachs banker Mnuchin isn’t a dab hand at communication. In 2018, he startled markets with a statement needlessly affirming banks weren’t in trouble. But what he’s proposing might be reasonable. The U.S. economy needs fiscal support, yet many Senate Republicans feel public spending has already gone too far. They might be prepared to see the unused funds paid out directly as grants to small businesses or households.
But there’s another possibility. An outgoing administration has little incentive to make life easy for Democratic President-elect Joe Biden, who takes over on Jan. 20. Removing the funding facilities might create problems for him, because their very existence has given banks and financial investors confidence to lend. Republicans’ apparent rediscovery of fiscal discipline, after running up a $3 trillion deficit this year, isn’t fully convincing.
The ambiguity is damaging, either way. Mnuchin and Powell could have resolved their problems in private. But the conflict could also have been avoided by not making the Fed responsible for the lending in the first place. The central bank’s job is to oversee monetary policy. Asking it to extend credit to businesses, while not unprecedented in a crisis, blurs that responsibility. It gives Congress a way to pretend the funds didn’t come from the public purse.
