The Treasury’s decision not to extend the majority of the Fed’s emergency lending facilities beyond the end of the year is unlikely to have a major impact on the economy given that those facilities made just $25bn of loans. At the margin, however, it could raise the likelihood that the Fed will attempt to provide more stimulus using its other tools, most likely by increasing the pace of its monthly asset purchases.
- The Treasury’s decision not to extend the majority of the Fed’s emergency lending facilities beyond the end of the year is unlikely to have a major impact on the economy given that those facilities made just $25bn of loans. At the margin, however, it could raise the likelihood that the Fed will attempt to provide more stimulus using its other tools, most likely by increasing the pace of its monthly asset purchases.
- In a letter to Fed Chair Jerome Powell made public late on Thursday, Treasury Secretary Steven Mnuchin announced that he would not be extending the majority of the Fed’s emergency 13(3) lending programs beyond their scheduled expiry at the end of the year. While the facilities providing liquidity to money market mutual funds, primary dealers, the commercial paper market and PPP lenders are set to be extended for an additional 90 days, the Fed’s facilities for purchasing corporate and municipal bonds, the Term ABS Loan Facility and the Main Street Lending Program – all of which are backed by the Treasury’s money allocated in the CARES Act – will now end in six weeks’ time as initially scheduled.
- That won’t have any practical significance if the incoming Treasury Secretary of the Biden administration was able to re-authorise the programs on 20th January. But Mnuchin’s letter also requested that the Fed return the unused funding back to the Treasury, which would allow $429bn of the $454bn originally allocated in the CARES Act to be re-purposed by Congress.
- With the Fed having made only $25bn of loans under the programs, compared to a limit of $2 trillion, their withdrawal was partly expected and is unlikely to have a major impact on the economy or markets. (See Chart 1.) Admittedly, the unveiling of the facilities in late March probably played a role in underpinning confidence and restoring function to private markets, coinciding with a clear rebound in bond issuance. But the muted market reaction to yesterday’s announcement suggests that they have now served their purpose. And as Mnuchin highlighted, they could be relaunched in the event of another bout of severe market stress, which would be much quicker a second time with the initial design and set-up already done.
- It could arguably be a positive for the economy if the unused funds end up being put to better use by Congress. The Municipal Liquidity Facility for example, which has purchased only $1.7bn of bonds, has been of limited use to many state & local governments facing huge revenue shortfalls but generally required by law to run balanced budgets. Although we are sceptical that another fiscal package will be passed in the lame duck session, the Treasury’s decision could, at the margin, improve the chances of a bipartisan deal being struck to provide more direct fiscal support to state & local governments.
- Nevertheless, the news might convince the Fed to provide more stimulus using their other policy tools. In a statement, the Fed expressed disappointment in the decision, arguing that the facilities were still playing an “important role”. Even before Thursday, officials had been dropping hints that they were considering revamping their large-scale asset purchases to better support the economy, perhaps spurred on by the recent upward drift in long-term Treasury yields. (See Chart 2.) That suggests there is a slightly higher chance now of the Fed increasing its Treasury purchases and/or re-focusing them towards the long end of the curve – even if the recent vaccine news suggests the economy may not ultimately need that extra support.
Chart 1: Fed’s 13(3) Lending Facilities ($bn)
Chart 2: US Treasury Yields (%)
Sources: Refinitiv, Federal Reserve
Andrew Hunter, Senior US Economist, email@example.com