Treasury Secretary Steven Mnuchin, headed out the door with the rest of the Trump administration, decided to try to hamstring President-elect Joe Biden's coronavirus efforts, and picked a fight with the Federal Reserve while he was at it. The CARES Act passed back in March allotted $454 billion for emergency lending programs run by the Fed and the Treasury in tandem. About $195 billion of it has been committed to covering any money the Fed might lose through its emergency lending programs, with $259 billion in reserve. Mnuchin has cut off the emergency lending programs and has instructed the Fed to return the uncommitted funds, a request he doesn't have the authority to carry out.
The Fed, which doesn't generally go public, responded. "The Federal Reserve 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 central bank's statement said. Which, if you're the Fed, is kind of blistering. "There have been disagreements in the past, but they're usually handled out of public sight," David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told The Washington Post. "It's unusual. But then these are really unusual times." Oregon Democratic Sen. Ron Wyden was a little more pointed. "Secretary Mnuchin is removing critical support from a weak economy against the Federal Reserve's wishes. This is economic sabotage," he said in a statement. "Secretary Mnuchin is salting the earth in an attempt to inflict political pain on President-elect Biden."
This fight has been brewing for a few weeks, with Fed Chairman Jerome Powell stressing that it’s not ready to wind down its programs. Earlier this week, he said that it is committed to using these programs "for as long as it takes until the job is well and truly done" and that "when the right time comes, and I don’t think that time is yet or very soon, we will put those tools away." It's a pot of money that has been eyed by Republicans in the Senate who want to claw the money back. Pennsylvania Sen. Pat Toomey, who will take over the Banking Committee of Republicans hold on the majority, said that everything is all better now—literally, "these temporary facilities helped to both normalize markets and produce record levels of liquidity"—so the remainder of the funds aren't needed. Current Banking Chair Sen. Mike Crapo of Idaho actually said it should go to debt reduction. And he got the amount that's not been committed yet wrong.
Economists like Paul Krugman argue that the emergency lending programs "can have a stabilizing effect even when they don't end up being used." Jason Furman adds: "Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets. But what is the downside to continuing them as insurance against worse developments?" Given that we're seeing the highest rate of infections and deaths yet from the coronavirus, we’re moving into the depths of flu season, and the promise of vaccines being widely available is at least several months away, it's a pretty safe bet there will be worse developments. Mnuchin knows that. This is sabotage.
If he gets away with it. Bharat Ramamurti, a member of the Congressional Oversight Commission set up to monitor coronavirus programs, says that "this indicates Treasury will force the Fed to shut down key programs at year-end, needlessly eliminating market protection." It can be a short-lived shutdown. The Biden administration will have the authority, he tweeted, to restart the lending programs, and he disputes Mnuchin's claim that Congress intended to stop new loans from the Fed as of the end of this year. "This is an unjustified and ideological decision by the Treasury Department," he writes." It is incumbent on the Fed to reject this request and prepare to restart these lending programs as quickly as possible once President-elect Biden is sworn in."
The long and short of it seems to be that the Treasury can stop lending programs as of Dec. 31, but the Biden administration can restart them on Jan. 20; and the Fed can and is likely to refuse Mnuchin's demand that it return some $195 billion in CARES Acts funds, keeping them available for next year. “Under its contracts with Treasury, the Fed can and should reject the request,” Ramamurti said. "While Secretary Mnuchin claims congressional intent was to halt all new loans at year-end, the text of the CARES Act doesn't say that. At a minimum, the Fed can continue to make loans using the $195 billion in equity Treasury has already committed."
