Mnuchin-Powell split shows rare discord as US economy struggles

Treasury Secretary Steven Mnuchin (left) and Federal Reserve chair Jerome Powell disagree over whether to keep in place emergency lending facilities designed to shore up the US economy. PHOTO: REUTERS
Treasury Secretary Steven Mnuchin (left) and Federal Reserve chair Jerome Powell disagree over whether to keep in place emergency lending facilities designed to shore up the US economy. PHOTO: REUTERS

WASHINGTON • The top two United States economic policymakers have parted ways over whether to preserve emergency lending facilities designed to shore up the economy - a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by a surge in coronavirus cases.

The disagreement erupted late on Thursday, touched off when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve chair Jerome Powell calling for the return of funding for several Fed lending programmes that rely on the Treasury's backing.

Minutes later, the central bank issued its own statement urging that "the full suite" of facilities be kept in place.

Investor reaction to the split was swift: Futures on the S&P 500 Index slumped 0.9 per cent in early trading yesterday in Asia, with haven demand sending Treasuries higher and pulling down yields.

Treasury chiefs and Fed chairs typically coordinate closely in times of crisis, appearing jointly before Congress and working in lockstep to ensure funding markets run smoothly.

The two agencies were tightly linked in the bailouts of the financial and auto industries more than a decade ago. And they became tied statutorily in the Cares Act economic rescue package in March that appropriated money for the Treasury to support Fed backstops for everything from municipal to corporate finance.

"This is a significant and disturbing breach at a critical time for the economy," said Mr Tony Fratto, who worked at the Treasury Department during the George W. Bush administration.

"We need all the arms of government working together and instead we're seeing a complete breakdown."

He noted that Washington remains at an impasse on fiscal stimulus as well.

Underscoring the success of the programmes the Fed established, Mr Mnuchin argued that some can be allowed to stop buying new assets at the end of next month. He asked that others be kept in place for an additional 90 days.

"Financial conditions are quite strong," Mr Mnuchin said in an interview. "The good news is, the markets have recovered significantly."

Companies do not need more loans and instead require more grant money, which requires action from Congress, he said.

Mr Mnuchin said that the purpose of his announcement was not to pit the Treasury against the Fed, and that he was merely carrying out the law prescribed by the Cares Act. The facilities could be reactivated, if needed, with congressional support or with other funds available to the Treasury, he said.

"It appears the Fed may be reading the legislation differently", given its statement on Thursday evening, said Mr Michael Feroli, chief US economist at JPMorgan Chase & Co.

The risk is that the discord between the key economic players undermines confidence at a time when growth is flagging.

Federal Reserve Bank of Dallas president Robert Kaplan said on Bloomberg TV on Thursday that there is the potential for gross domestic product (GDP) to shrink this quarter and even the next.

The economy is also set to go without fiscal stimulus: Republicans and Democrats remain deadlocked on a new package, and measures - including extended unemployment benefits - are set to expire next month.

"I was a bit surprised," said Federal Reserve Bank of Atlanta president Raphael Bostic about the Treasury's statement, in a Bloomberg TV interview.

"Given where the economy is - and there's so much uncertainty still out there - it's prudent to keep those things open so that when people, if they do have stress, they can draw upon it."

Among the initiatives that will no longer be able to extend new credit are two facilities that allowed the Fed to buy corporate bonds for the first time. They helped to unfreeze that market even before the effort was up and running, and businesses have since logged record amounts of debt issuance.

Another, the Main Street Lending Programme, has had a slow start, and the Fed recently loosened its terms to encourage banks and smaller businesses to participate.

Mr Powell himself said at a virtual conference on Tuesday that the time to discontinue the lending facilities was "not soon", highlighting that the central bank typically keeps its backstops in place for some time after a crisis hits.

He has repeatedly praised the Cares Act for what he has described as essential support amid the historic collapse in GDP in the spring.

The US Chamber of Commerce called for a reconsideration of Mr Mnuchin's decision.

"We strongly urge these programmes be extended for the foreseeable future and call on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer," the chamber said in a statement.


A version of this article appeared in the print edition of The Straits Times on November 21, 2020, with the headline 'Mnuchin-Powell split shows rare discord as US economy struggles'. Subscribe