March 28, 2023

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Sources say the Munuchin decision will reduce the Fed’s debt power, but may revive emergency programs

Sources say the Munuchin decision will reduce the Fed's debt power, but may revive emergency programs

U.S. Treasury Secretary Steven Munuchin and Federal Reserve Chair Jerome Powell met before the House Financial Services Committee testified before the Treasury Department and the Federal Reserve’s Coronavirus (COVID-19) pandemic response monitoring on Capitol Hill, Washington. September 22, 2020.

Joshua Roberts | Pool | Reuters

The decision by Treasury Secretary Steve Munuchin to end the Fed’s emergency lending program by December 31 will significantly reduce the central bank’s ability to backstop the economy. People familiar with the situation say the Fed will still have significant debt power when the system comes under shock.

Munuchin released a letter on Thursday Does not extend the Fed’s programs It used Congress Cares Act funds. Created in response to the financial panic of lockdowns in the spring, these programs have given the Fed the ability to lend up to $ 4.5 trillion in various financial markets. Munuchin argued that the expiration of the funds was the intention of Congress.

The Fed, in an extraordinary statement, openly stated its disapproval of the decision, saying “the full suite of emergency facilities established during the coronavirus epidemic would like the Federal Reserve to continue its important role as a backstop for our still struggling economy and vulnerable economy.”

But people who know this decision are not Munuchin or A New Treasury Secretary from the Biden Administration Under the new agreement with the Fed may decide to renew emergency loan programs. The existing $ 25 billion in equity from the Treasury will be left to the Fed from the Cares Act funds, in addition, the Treasury has approximately $ 50 billion in the Exchange Stabilization Fund. Using the 10-to-1 leverage – which was used for emergency operations – the Fed has about $ 750 billion in debt power to backstop markets in the event of a disruption. Congress approval is not required. However, there must be a new agreement between the Secretary to the Treasury and the Board of Governors of the Federal Reserve.

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The Fed, so far, has lent only $ 25 billion from the programs that are being shuttered, making the $ 750 billion contextually significant.

This is not the right setting from the Fed’s point of view, as the economy needs some new shock to restart programs. The Fed hopes to avoid that shock by keeping programs. But the money will be there if needed.

Meanwhile, the repayment of the unused 9 429 billion from the Fed to the General Fund has already created money that has already been funded, and Congress may decide to fund additional loans or grants for expanded unemployment benefits or small businesses. There is an additional $ 135 billion already funded from the Paycheck Protection Program. The new relief package may also include new money allocated by Congress, but a large portion of it is already funded.

The medium-sized businesses that appear to have started borrowing at the Fed’s Main Street Lending Facility appear to be the biggest losers. Facility rules have recently been amended to allow smaller loans of less than 100,000. It will be close to new loans in two weeks and will only be renewed with an agreement between the Fed and the Treasury.

The U.S. Chamber of Commerce criticized Munuchin for the same reason. It said in a statement, “Surprisingly ending the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, the Incoming Administration is tying hands pre- and unnecessarily and closing the doors on important liquidity options for businesses at one time.”

Munuchin extended for 90 days three programs that did not use the Cares Act funds, including facilities that pushed commercial paper and money markets.

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