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US Treasury refuses to extend some of the Fed’s crisis response tools

The US Treasury has decided not to expand some of the Federal Reserve’s emergency lending facilities at the start of the coronavirus pandemic, prompting a rare statement of disappointment from the central bank, and the economy is “tensed and vulnerable.” I warned that it would remain.

In a letter to Federal Reserve Chairman Jay Powell on Thursday, Treasury Secretary Steven Mnuchin urges the return of unused funds from five emergency programs scheduled to expire in late December. I asked the central bank.

The facilities that Mr. Mnuchin is trying to close are: Two schemes set up to buy corporate bonds. Five facilities created to lend to medium-sized businesses, collectively known as the Main Street Lending Program. One program to lend to state and local governments. The other is to support asset-backed securities.

However, Mnuchin has asked Powell to extend four emergency credit lines that block the short-term funding market, including commercial paper and money market mutual funds, for 90 days.

High-ranking Federal Reserve Board officials argue that expansion of lending facilities guarantees financial market stability at a time when economic outlook remains weak due to the decline in fiscal support and the surge in coronavirus cases.

“The Federal Reserve Board hopes that the set of emergency facilities established during the coronavirus pandemic will continue to play an important role as a backstop for the still tense and fragile economy,” the US Central Bank said in a statement Thursday. I’m out. ”

Mr Mnuchin is facing pressure from some Republicans on Capitol Hill to close lending facilities, given concerns that improved recovery and government recession are distorting the market.

In a letter to Mr Powell, the Treasury Secretary said that ending the emergency line of credit would free Congress $ 455 billion in funds available elsewhere. Mr Mnuchin said the Treasury would need to seek new approval in the “unlikely event” when the facility would be needed again.

“We are very honored to have worked on the implementation of these programs. We hope that thanks to our collective action, Congress will show similar trust to the Chairman of the Federal Reserve Board and the Secretary of the Treasury in the future. “I am,” wrote Mnuchin.

Many investors support the Fed’s push to maintain an emergency credit line as an insurance policy against the deterioration of financial markets and warn of the danger of removing crisis-fighting weapons from the arsenal. Neil Bradley, chief policy officer at the U.S. Chamber of Commerce and Industry, the largest business lobby group in the United States, said Mnuchin’s announcement was “prematurely and unnecessarily tied up with the next administration and when needed. An important liquidity option for companies. ”

The market responded quickly to the Treasury’s announcement, with stock futures falling at the start of Asian trading days. S & P 500 futures contracts fell 0.9%, while Nasdaq 100 futures fell 0.5% during periods of generally lighter trading.

Instead, investors bought government bonds, which are considered shelters. Yields on 10-year Treasuries fell to 0.82%, down 0.05 points from Thursday’s highs. Bond yields go down as prices go up.

“Risk from a market perspective is not always that. [the Fed facilities] It will expire on its own. The risk is that several things happen at once, “said Adam Marden, a multi-asset investment analyst at T Rowe Price, who loses credit lines in combination with reduced financial support and a surge in coronavirus infections. I pointed out that there is a possibility. next month.

The Federal Reserve Board of Governors saw the credit facility as an important part of its response to the coronavirus, causing a major backlash in financial markets after the initial slump, but using only a small portion of its available lending capacity. It was.

Some companies and local governments will secure better financing conditions through the regular capital markets, and some medium-sized companies, especially commercial real estate groups, will benefit from overly strict facility conditions. I complained that I couldn’t.

Asset column chart, $ 1 billion showing Steven Mnuchin demanding wrapping of four emergency Fed facilities

Mr Mnuchin’s move could help unleash deadlocked negotiations in a new round of fiscal stimulus by releasing billions of dollars for Congress to allocate, one U.S. Treasury official said. Said.

“All of these funds can be used without borrowing additional dollars,” officials said.

Democrats have demanded more than $ 2 trillion in additional spending, but faced resistance from Congressional Republicans hoping for a much smaller bailout package. No substantive negotiations have taken place since the November 3 elections.

Failure to expand some of the emergency credit lines, especially if new tensions begin to emerge in financial markets, could impede the ability of the next Biden administration to address the economic implications of a pandemic. However, the Treasury may, under certain conditions, reinstate expired lines of credit funds in a short period of time, if desired, without Congressional approval.

Pennsylvania Republican Senator Pat Toomey, who wanted to close the loan facility, praised Mnuchin’s decision. “Parliament’s intentions were clear. These facilities were temporary, provided liquidity and were planned to shut down by the end of 2020,” he said.

Additional report by Eric Platt and Andrew Edgecliffe-Johnson

US Treasury refuses to extend some of the Fed’s crisis response tools

Source link US Treasury refuses to extend some of the Fed’s crisis response tools

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