Mnuchin defends ending crisis lending tools amid split with Fed

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Steven Mnuchin, the US Treasury secretary, was on Friday battling accusations that he had made America more vulnerable to a financial crisis, after breaking with the Federal Reserve and refusing to renew some of its crisis lending facilities.

The move by Mr Mnuchin, in defiance of the central bank’s wishes for a full extension of its emergency credit programmes, unsettled investors already worried that the surge in coronavirus cases and fading fiscal support has weakened the recovery.

The Treasury secretary’s decision also fuelled criticism that US President Donald Trump is seeking to constrain the incoming Biden administration’s capacity to tackle the economic fallout from the pandemic, as part of a broader effort to delegitimise and damage the future Democratic presidency.

In an interview with CNBC, Mr Mnuchin defended the step to wind down the facilities at the end of the year, saying it was “not a political issue” and there was “a lot of firepower left” to respond to financial trouble.

“We said: ‘these are emergency tools, and when the emergency is over let’s put them away’,” Mr Mnuchin said. “Well, the medical emergency may not be over but . . . financial conditions are in great shape,” he added, citing the strong performance recently of corporate and municipal debt as well as equities.

Mr Mnuchin announced that he would cut some of the crisis facilities — which helped prop up financial markets since the start of the pandemic — in a letter to Jay Powell, the Fed chair, on Thursday night.

While the Treasury secretary supported the renewal of schemes to help short-term debt markets like commercial paper and money market mutual funds, he called for the termination of facilities to buy corporate and municipal debt, extend loans to medium-sized businesses and support asset-backed securities.

The Fed immediately fired back by saying it would prefer that the “full suite” of its tools “continue to serve their important role as a backstop for our still-strained and vulnerable economy”. The statement marked a rare public split between Mr Powell and Mr Mnuchin, who have generally had good relations throughout the crisis.

On Friday morning, Charles Evans, the president of the Chicago Fed, added to the criticism of the Treasury department from the central bank. “I think that backstop role might be important for quite some time, so it’s disappointing,” Mr Evans told CNBC in reaction to the decision.

Federal Reserve's alphabetti spaghetti of emergency measures updated as of November 18th.

Mr Mnuchin was also criticised by Larry Summers, one of his predecessors at the helm of the US Treasury under Bill Clinton. Mr Summers said Mr Mnuchin’s action was “just the opposite” of how Hank Paulson, the Treasury secretary under George W Bush, handled the White House transition during the financial crisis after the 2008 election.

He said Mr Mnuchin had allied himself with Mr Trump’s “burn the house down” approach, and Treasury officials should consider resigning.

“We cannot predict when or if a panicky cascade will happen in credit markets,” Mr Summers wrote in a tweet. “Aftershocks after financial crises (and earthquakes) are not uncommon. Removing a capacity to respond as Steven Mnuchin has sought to is wrong.”

Mr Mnuchin said fears that markets were being left without a backstop were overblown because the Fed’s short-term funding facilities would remain in place and others could be reactivated from existing Treasury resources without congressional approval. “I consider that to be a pretty good bazooka,” he said.

Line chart of Year-to-date performance (%) showing US stocks have rebounded from their March lows

The Treasury secretary did not concede that he would be passing the department’s baton to the Biden administration in January, reflecting Mr Trump’s own refusal so far to accept the election result. Mr Mnuchin also said the unused funds from the lapsing programmes should be used for a new round of stimulus.

“We don’t need this money to buy corporate bonds, we need this money to go help small businesses that are still closed, or hurt through no fault of their own. For people who are going to be on unemployment, and unemployment is running out,” he said.

Mr Mnuchin said he and Mark Meadows, the White House chief of staff, would be discussing the possible stimulus options with Republican leaders in Congress, though no negotiations are set yet with Democrats.

US equity futures dropped after Mr Mnuchin’s letter was released on Thursday, but markets regained their footing on Friday, although economically-sensitive stocks lagged. The benchmark S&P 500 was 0.2 per cent lower by lunchtime in New York, as shares of industrials goods behemoths like Raytheon and Boeing and banks including Wells Fargo fell. Junk bonds also weakened marginally.

“This is a very unusual show of public discord between the Fed and Treasury,” said Gershon Distenfeld, the co-head of fixed income at AllianceBernstein. “Obviously there is some risk the withdrawal of this backstop spooks [investors].”

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