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The brewing stimulus battle between the Fed and Treasury

A battle over stimulus escalated in Washington on Thursday night: Treasury Secretary Steven Mnuchin put emergency lending programs it set up alongside the Fed chair Jerome Powell on the chopping block.

Why it matters: The coronavirus pandemic is worse than when these facilities were established in the spring — and economists worry about a resulting steep economic backslide.


  • If that happens, Treasury’s move all but ensures the economy and financial markets are flying solo: Congress hasn’t made progress on another aid package — and now the Fed has been hampered in offering support of its own.

What’s going on: The Treasury will let a slew of programs — including one that allowed the Fed to buy up corporate debt, and others that issued loans to small businesses and localities — expire at the end of the year. (It will seek to extend a few other programs, that don’t require Treasury funds.)

  • Among Mnuchin’s reasons: Banks are well-positioned to lend and financial conditions are healthy. Critical markets, like the municipal or corporate debt market, are functioning smoothly after freezing up when the pandemic hit.
  • Worth noting: The Fed programs were a reason markets returned to working order. The Fed simply announced it planned to backstop those markets. That was enough to soothe investors.

The Fed rebuked Mnuchin’s move. The central bank, which almost never issues public statements, said it would "prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

  • The Fed can’t act on its own to make drastic changes to the emergency loan programs — it needs Treasury’s signoff. Extending the programs is considered such a change.

Mnuchin also ordered the Fed to return the unused funds, so Congress can reallocate the money elsewhere.

  • One big concern: This could delay the incoming Biden administration from restarting or green lighting fresh Fed programs. Replenishing these funds would require an act from Congress.

What they’re saying: Mnuchin told Bloomberg late Thursday that businesses need grants — which Congress has the power to dole out — not the loans that a sunsetting Fed program issued.

  • That Fed program, which funds loans to small and midsized businesses, has seen limited demand. So has another meant to lend to cash-strapped localities.
  • Yes, but: The “facilities didn't see large take-up in the past, & they might not be used much more in 2021, but getting rid of them now is adding on even more risk," Ernie Tedeschi, a policy economist at Evercore and former economist at the Treasury Department, said on Twitter.

Between the lines: The programs’ initial September expiration was pushed off earlier this year.

  • There was some expectation that these programs would roll over into next year. The economy is still fragile, against a backdrop of skyrocketing coronavirus cases. The economy could quickly deteriorate, making these expiring programs all the more necessary.

There are questions about what the Fed can do next.

  • Bharat Ramamurti, a watchdog for CARES Act funds, tweeted the Fed can reject Mnuchin’s request — then keep making loans with funds Treasury has already committed.

Go deeper: Steven Mnuchin acts to hobble the Fed

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