Mnuchin tries to play down dispute with Fed
US Treasury Secretary Steve Mnuchin tried to play down his decision not to extend several emergency Federal Reserve lending facilities but economists said his move risked damaging the economy.
On Thursday Mnuchin asked the central bank to return $454bn of unused funds from five emergency programmes established under the CARES Act, due to expire at the end of December. His request unnerved markets and prompted the Fed to say it was disappointed because the economy was still "strained and vulnerable".
The programmes include those designed to buy corporate debt, lend to medium-sized "main street" businesses, lend to state and local governments and support asset-backed securities. The Fed's senior officials had called for the facilities to be extended to maintain stability in financial markets, according to reports.
Mnuchin said on Friday he had worked closely with the Fed, headed by Jay Powell, throughout the Covid-19 crisis and that his request simply reflected the law enacted by Congress, which expires at the end of 2020.
With the Trump administration refusing to acknowledge Democrat Joe Biden's presidential election victory the move had nothing to do with politics, Mnuchin said.
"It was very clear the congressional intent is it expires on December this year. It's very clear in the law," Mnuchin told CNBC. "It wasn't a decision on whether we need these or we didn't need these."
He said the programmes could be reactivated and that Congress should to reallocate the funds if it wanted to do so. Other programmes would be extended and he had more than $750bn of firepower if needed. "Markets should be very comfortable that we have plenty of capacity left," he said.
But economists said Mnuchin's decision risked knocking confidence in the US economy with Covid-19 cases rising and the government deadlocked on a fiscal aid package.
Gregory Daco, chief US economist at Oxford Economics said: "The emergency lending facilities have been little-used, but their existence has been key in ensuring a credible safeguard against financial market stress. With the Covid-19 crisis worsening and activity slowing in the absence of fiscal aid, the decision to curtail the Fed’s firepower could unsettle markets and exacerbate economic stress."
He said the risks included higher borrowing costs for struggling companies, tougher credit conditions for smaller businesses and greater financial stress for municipalities. Mnuchin's move tilts the balance towards greater monetary stimulus through extended or higher levels of asset purchases by the Fed.
Philip Marey, senior US strategist at Rabobank, said Mnuchin had shot the Fed in the back with US economic indicators weakening.
"The combination of rising Covid-19 infections and lack of additional fiscal stimulus after the CARES Act may now be finding its way into the economic data," Marey said. "Republicans had earlier indicated they were worried that the municipal lending facility and the main street lending programme could be used by the Democrats to bypass Congress if Republicans were to block additional federal government support to local governments and small and midsized businesses. So Mnuchin’s action is clearly related to politics."
Mnuchin said: "There were a lot of people on the Democratic side who questioned giving me $500bn that I could, quote, 'do with whatever I want' so I find it kind of ironic now that I'm being prudent and returning the money to Congress like I'm suppose to that people are questioning that."