New restrictions, lack of fiscal stimulus and expiration of safety nets raise concerns for economic recovery.
United States Treasury Secretary Steven Mnuchin has denied that he is attempting to limit the choices President-elect Joe Biden will have to promote economic recovery by ending several emergency loan programmes being run by the Federal Reserve.
Mnuchin said his decision was based on the fact that the programmes were not being heavily utilised. He said on Friday that Congress could make better use of the money by reallocating it to support grants to small businesses and extended unemployment assistance.
“We’re not trying to hinder anything,” Mnuchin said in a CNBC news interview. “We don’t need this money to buy corporate bonds. We need this money to go help small businesses that are still closed.”
However, critics saw politics at play in Mnuchin’s decision, saying the action would deprive the incoming administration of critical support the Fed might need to prop up the economy as coronavirus infections spike nationwide.
“There can be no doubt, the Trump administration and their congressional toadies are actively trying to tank the US economy,” Senator Sherrod Brown, D-Ohio, said in a prepared statement on Friday. “For months, they have refused to take the steps necessary to support workers, small businesses and restaurants. As the result, the only tool at our disposal has been these facilities.”
Mnuchin had on Thursday written to Federal Reserve Chairman Jerome Powell announcing his decision not to extend some of the Fed’s emergency loan programmes, which had been operating with support from the Treasury Department. The decision will end the Fed’s corporate credit, municipal lending and Main Street Lending programmes as of December 31.
The decision drew a rare rebuke from the Fed, which said in a brief statement on Thursday that the central bank “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”.
The US Chamber of Commerce also criticised the move. “A surprise termination of the Federal Reserve’s emergency liquidity program, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration and closes the door on important liquidity options for businesses at a time when they need them most,” said Neil Bradley, the chamber’s executive vice president, in a prepared statement.
Private economists argued that Mnuchin’s decision to end five of the emergency loan facilities represents an economic risk.
“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.
Under the law, the loan facilities required the support of the Treasury Department, which serves as a backstop for the initial losses the programmes might incur.
In his letter to Powell, Mnuchin said he is requesting that the Fed return to Treasury the unused funds appropriated by Congress.
He said this would allow Congress to reappropriate $455bn to other coronavirus programmes. Republicans and Democrats have been deadlocked for months on approval of another round of coronavirus support measures.
In public remarks on Tuesday, Powell made clear that he hoped that the loan programmes would remain in effect for the foreseeable future.
“When the right time comes, and I don’t think that time is yet, or very soon, we’ll put those tools away,” he said in an online discussion with a San Francisco business group.
The future of the Main Street and Municipal Lending programmes has taken on greater importance with Biden’s victory. 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 programmes. That would provide at least one avenue for the Biden administration to provide stimulus without going through Congress.
Neither programme has lived up to its potential so far, with the Municipal Lending programme making just one loan, while the Main Street programme has made loans totalling nearly $4bn to about 400 companies.
Republicans including Senate Banking Committee Chairman Mike Crapo of Idaho and Senator Pat Toomey of Pennsylvania supported Mnuchin’s move.
“Congress’ intent was clear: These facilities were to be temporary, to provide liquidity and to cease operations by the end of 2020,” Toomey said in a statement. ”With liquidity restored, they should expire, as Congress intended and the law requires, by December 31, 2020.”