Federal Reserve emergency loan programs at the center of political struggle

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WASHINGTON – A political fight is brewing over whether to extend critical programs the Federal Reserve has rolled out to help maintain credit to businesses and municipalities amid the pandemic-induced recession.

The dispute has the potential to disrupt financial markets, which have calmed down considerably since the Fed announced in March and April that it would be putting safety nets in place in response to market turmoil spurred by the coronavirus pandemic.

These programs expire on December 31, and it is not clear whether the Trump administration will agree to extend them. Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Steven Mnuchin must jointly decide whether they will continue the programs – including one that buys state and local bonds, another that buys government bonds. corporate debt and another that provides loans to small and medium businesses. large companies. Officials will likely make the decision in early to mid-December, according to a senior Treasury Department official.

The Fed may be inclined to continue the efforts, but Mr. Mnuchin, whose program funding is provided by the Treasury Department, reported that it would be favorable to the end of whoever buys municipal bonds. And he is under increasing pressure from Republicans to allow the five Treasury-backed programs to cease.

Senator Patrick J. Toomey, a Republican from Pennsylvania who could soon lead the Senate Banking Committee, argues that the Fed and the Treasury do not have the legal authority to extend new loans or buy new securities at- beyond this year without congressional approval, according to a person familiar with the matter. While this view is disputed by legal experts, Mr. Toomey also believes Congress intended to end relief programs on December 31.

The expiry of the programs could come at exactly the wrong time, as the United States faces an expected increase in coronavirus cases this winter and fiscal stimulus measures passed by Congress in the spring fade away. While lawmakers have played with passing a new relief bill before next year in the lame session of Congress, President Trump’s electoral defeat makes the outcome very uncertain.

“It would be ill-advised to cut the programs at the end of the year, to open the markets to year-end disruption,” said Scott Minerd, global director of investments at Guggenheim Partners, who expects programs are extended.

Mr. Mnuchin has clearly in responses to congressional questions that he is not in favor of extending the municipal bond program. While Mr Mnuchin’s comment was specific to this effort, a senior treasury official laid out the reasons why the others ended, mainly centered on the belief that the worst of the economic crisis is over and programs are failing. should not replace congressional support.

But the programs are primarily designed as backup options: the financial terms for buying public and local debt, for example, are not generous enough to compete in a well-functioning market, and the corporate bond program now only buys on a small scale. Their main aim was to reassure investors that the central bank is there as an option of last resort if conditions worsen.

Economists and analysts say it makes sense to keep this option open until a vaccine is widespread and the crisis is clearly over – and there is plenty of capacity left in the Fed’s programs to buy. more debt and more loans. But the central bank cannot make significant changes to the terms of the programs to keep them in effect until 2021 without Treasury approval.

Some Democrats had started to envision the municipal program as a backup option in the event that state and local government relief proved difficult to pass through Congress. While the terms of the program are not attractive at the moment, they could in theory be relaxed under a Treasury Department of the Biden administration. Taking that program off the table would leave Democrats with fewer options – and give Republicans another bargaining chip in stimulus negotiations.

Mr Toomey spoke of limiting support programs for months on the grounds that they are no longer needed and could discourage private investment. Politics reported last week that he would be in favor of all programs being terminated.

Lawyers generally agree that the Fed and the Treasury can expand the programs without Congress – the way they are structured means that the Treasury has already made loans to the Fed, which then uses that money to insure against risk when ‘he buys bonds and grants loans. The law that provided the funding allows these “existing” loans made from government credits to remain in arrears.

Democrats also disagree with Mr. Toomey’s point of view.

“It is clear that the Fed and the Treasury have the power to expand the facilities, and they should,” said Bharat Ramamurti, a Democratic member of the Congressional Oversight Committee, which oversees the programs. “There is a continued need for municipalities and small businesses, and there is a significant risk of market disruption if these facilities are not extended. “

Senators Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, Mark Warner of Virginia and Chuck Schumer of New York – all powerful Democrats – sent Mr. Powell and Mr. Mnuchin a letter last week saying that the law ” is clear that these facilities can be extended “on the authority of the Treasury and the Fed and that” failure to signal agencies’ intention now creates undue uncertainty and threatens the ability of programs to promote economic recovery. “

If a coronavirus vaccine is rolled out in the coming weeks, the Treasury Department may be less inclined to extend programs. Mr Trump could also block a reauthorization by pressuring Mr Mnuchin, leaving Mr Biden with fewer economic stimulus tools at his disposal.

There are signs that programs may expire without causing disaster. Markets are functioning normally now, having calmed down after the Fed signaled it would put in safety nets. It could be that investors have gotten over the spring panic and no longer need a Treasury and Fed backup option.

But it’s also possible that the comfort and security provided by a Fed safety net is still needed.

Millions of people remain unemployed, the service sector continues to be hit hard, and state and local governments face budget deficits, albeit smaller than some originally anticipated. Further closures, even localized ones, amid rising coronavirus cases could cause a reversal in risk-taking that is shaking up markets again.

“Some market participants have asserted that the expiration of ‘the municipal program’ may be a non-event since its existence is no longer essential to the functioning of the market,” Citigroup market analysts wrote in a recent research note. . “These claims are false, in our opinion.”

Analysts polled by The New York Times were divided over what the end of the programs might mean for the markets. Some thought they could operate on their own as the economy recovered well. Others pointed to the risks that lie ahead and suggested that removing the safety net now would be a bad idea.

“You have to see these extended facilities, especially if you are not going to see a stimulus,” Matthew Luzzetti, chief US economist at Deutsche Bank, said in an interview last week. “Just having that safety net has been a very important signal to the market that the Fed is there.”

Asked at a press conference last week on whether the programs would be extended, the Fed chairman objected.

“We just looked at this issue,” said Powell. “We had a lot to do. “

After the press conference, Michael Feroli, economist at JPMorgan Chase & Company, wrote in a research note that for the programs to be extended, “not only will the Fed Board have to decide that it is necessary, but the Treasury will also have to be convinced that it is both necessary and legal.

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