The Fed vs. Steven Mnuchin

It’s easy to be popular when you’re handing out billions in free money. But that reality also works in reverse.

The Fed, along with nearly everyone else in the world of finance, is concerned the Treasury Secretary has prematurely terminated emergency lending programs needed to stabilize the economy.

While only a fraction of the capital has been deployed, the mere existence of the programs has successfully placated investors and calmed financial markets.

Lending A Helping Hand

As part of the CARES Act, the Treasury was allocated $455 billion to backstop loans made by the Fed. Described as a “bazooka,” the capital was meant to prop-up corporate and municipal credit markets and provide loans to small and medium-sized businesses.

Pulling The Plug: Last Thursday, Treasury Secretary Mnuchin sent a letter to Fed Chairman Jerome Powell asking the central bank to return all unused funding, which he said would allow lawmakers to “re-appropriate” $455 billion for other coronavirus aid efforts.

Appearing on CNBC last Friday, Mnuchin said he believed Congress intended for the loan programs to end this year and, in addition, “financial conditions are in great shape.”

Mixed Reactions

In a rare statement of dissent, the Fed said it preferred to keep “the full suite of emergency facilities established…for our still-strained and vulnerable economy.” That’s about as animated as a central banker can get.

The reactions of other commentators on both sides of the aisle were equally critical:

• Former Treasury Secretary Larry Summers: “Aftershocks after financial crises (and earthquakes) are not uncommon. Removing a capacity to respond as Steven Mnuchin has sought to is wrong.”
• Isaac Boltansky, director of policy research at Compass Point Research & Trading: “Even in the storied annals of Washington, this is a uniquely puerile and political maneuver.”
• Kate Bedingfield (a Joe Biden spokesperson): “Deeply irresponsible.”
• The U.S. Chamber of Commerce: “(It) 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.”

The Takeaway:

Not everyone hated it. The WSJ editorial board commended Mnuchin’s move.