Treasury Secretary Steven Mnuchin is seeking to end a handful of the Fed facilities that bought corporate bonds as well as the Main Street Lending Program targeted towards small- and medium-sized businesses.
Mnuchin is focused, the official said, on additional paycheck aid to idled workers, unemployment compensation and grants to help businesses that have been struggling amid COVID shutdowns, as many firms can not take on more debt.
The Fed issued a rare public rebuke in a statement, saying that it "would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy".
Mnuchin told Fed Chair Jerome Powell in a letter on Thursday that the $455 billion allocated to Treasury under the CARES Act last spring - much of it set aside to support Fed lending to businesses, nonprofits and local governments - should instead be available for Congress to reallocate.
Mnuchin noted that "in an abundance of caution" he requested the central bank to extend for another 90 days four of the emergency lending facilities - the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Liquidity Facility and the Paycheck Protection Program Liquidity Facility, while shutting down another five facilities. Sherrod Brown, D-Ohio, said in a prepared statement Friday. "As the result, the only tool at our disposal has been these facilities".
The U.S. Chamber of Commerce also criticized the move.
"While the backstop measure have been little used so far, the deteriorating health and economic backdrop could shine a bright light on the Fed's diminished recession-fighting arsenal and prompt an adverse market reaction", said Gregory Daco, chief US economist at Oxford Economics. Republicans and Democrats have been deadlocked for months on approval of another round of coronavirus support measures.
Mr. McConnell said Congress should use the untapped Federal Reserve funds for a coronavirus relief bill.
In other words, the likelihood that the end of the year arrives without another stimulus package having been passed by Congress remains very high, and now the Fed's abilities to fill the gap by at least lending directly to the real economy is hindered.
Mnuchin's comments came after markets rose Thursday on hopes for further stimulus after U.S. Senate Democratic leader Chuck Schumer and Republican Majority Leader Mitch McConnell chose to resume COVID-19 relief talks. The law appropriated funds to act as loss-absorbing buffers that enabled the Fed to stabilize financial markets and make loans to companies and municipal debt issuers.
So far, though, markets have remained calm, potentially a sign that investors either believe credit markets are more stable or have faith the Biden administration will be able to provide support if needed, Perli said. Many progressive economists have argued that a Democratic-led Treasury could support the Fed taking on more risk and making more loans to small and mid-sized businesses and cash-strapped cities under these programs.
Biden has urged Congress to come together on a stimulus effort in 2020 rather than waiting for him to take office on January 20.
Neither program has lived up to its potential so far, with the Municipal Lending program making just one loan, while the Main Street program has made loans totaling around $4 billion, to about 400 companies.
US Senator Pat Toomey, a Republican, praised Mnuchin's move.
But the programs funded by the CARES Act, including the facilities purchasing corporate bonds or providing loans to small and medium-sized businesses and state and local governments, will expire on December 31.