Fed, Treasury in Rare Public Spat, Shelton Nomination Blocked
Fed, Treasury in Rare Public Spat, Shelton Nomination Blocked
The Federal Reserve and the U.S. Treasury, which have otherwise worked congenially and effectively in response to coronavirus, showed signs of discord in public on Thursday when Treasury Secretary Steve Mnuchin issued a letter that refused to extend emergency lending programs. His letter stated that the programs had accomplished their objectives and that markets had been stabilized. On Tuesday, Fed Chairman Jerome Powell had publicly stated that he did not think it was time for any tools to be removed from the Fed's belt.
Mnuchin and Powell seemingly pulled off an impressive crisis response together; however, Mnuchin has been facing pressure from some of his Republican colleagues to reign in what they perceived as government largesse. Earlier this month, Senator Pat Toomey (R-PA) worried publicly that Democrats might use the Central Bank to usurp the power of the purse that constitutionally resides with the Congress. Mnuchin requested the return of about $70 billion in funds from the Fed that would have been used as loss reserves for loans yet made. This rare imbroglio may be the result of the wider efforts to stymie an incoming Joe Biden Administration by President Donald Trump.
There is some legal disagreement on whether or not the Fed needs to return the requested funds. Indeed, Mnuchin's assertion in his letter that the legislative intent was to have the programs expire on December 31st is disputed by some of the primary drafters of the legislation. Nonetheless, there is an opening for a new Treasury Secretary to extend the programs. President-Elect Biden has said he will announce his Treasury Secretary soon, and Former Fed Chair Janet Yellen and current Governor Lael Brainerd are both on the short-list. A possible item for the incoming Biden administration would be a re-design of the Main-Street Lending program, which had initial shortcomings that prevented significant uptake from banks or businesses. This, however, may be hampered if the money is returned as requested.
While the programs to purchase corporate bonds, the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF), were huge successes that accomplished their intent with a fraction of the authorized capital, the Municipal Liquidity Facility (MLF) has become the center of a partisan brawl; something which the Fed dreads.
Some analysts have publicly worried that any perception of the Fed taking their foot off the gas, much less the foot getting taken off the gas when the Fed is saying pedal to the medal, may not be what markets want to see. Time will tell.
In other Fed news, it looks as if the nomination of Judy Shelton to the Fed was blocked in the Senate after several GOP Senators had to quarantine from exposure to the virus. While her nomination may be reintroduced, it is considered unlikely.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 0.82% down from last week 0.90%.
