Treasury decision to dismantle Fed emergency lending programs reeks of politics


Treasury Secretary Steven Mnuchin is a former Goldman Sachs
banker – so he had to know the markets would not be cheering on his decision not to renew the Federal Reserve’s three main emergency lending facilities, which helped thaw frozen markets at the start of the pandemic.

In an unusual rebuttal, the Fed signaled its opposition to the decision to cancel programs to provide loans to businesses, states and municipalities, as well as small businesses.

“The Federal Reserve would prefer that all of the emergency facilities put in place during the coronavirus pandemic continue to play their important role in supporting our still strained and vulnerable economy,” the central bank said in a statement.

Krishna Guha, a former New York Fed staff member now at Evercore Partners, said in a research note that the Treasury decision “appears to be a politicization of market stabilization policy.”

“Mnuchin’s decision will tighten financial conditions and remove a safety net for markets at the wrong time.”

(During an appearance on TBEN on Friday morning, Mnuchin insisted his decision was not political and that he was “just following the intention of Congress.”)

The Dodd-Frank banking reform legislation that followed the 2008 financial crisis introduced a new requirement for Treasury approval of the Fed’s emergency lending measures.

For now, investors seem comforted by the prospect that the new Treasury Biden will revive the programs, albeit with a much smaller total dollar amount supporting the losses, given that the $ 454 billion allocated by Congress in CARES law expire with emergency facilities.

“For about three weeks in January, markets will operate without the support they’ve had since spring,” wrote Michael Ferli, chief US economist at JP Morgan and former New York Fed economist, in a note to clients. .

The move comes at a perilous time for the economy – just as the surge in Covid cases across the country is dealing another blow to confidence, spending and investment.

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