Usually when the US Treasury Department clashes with the Federal Reserve, it calls for a looser monetary policy as opposed to the central bank’s determination to curb inflation. That these positions are reversed is not even the most remarkable feature of outgoing Finance Secretary Steven Mnuchin’s decision to reduce the firepower behind some of the Fed’s anti-crisis measures. Instead, it looks like an attempt to salt the country ahead of the inauguration of President-elect Biden by setting himself up to fight a stalemate in Congress if those policies are needed again.
On Thursday, Mr Mnuchin, in a letter to Fed Chair Jay Powell, called on the central bank to return $ 415bn of unused funds that Congress has provided for emergency shelter to lend to the Federal Reserve. This will put an end to a set of policies designed to support corporate bond markets, medium-sized business, government and local bond lending, and an asset-backed securities market. Mr Mnuchin has expanded policies designed to help facilitate short-term financing over 90 days. The central bank responded in a statement saying it preferred to have access to “the whole package of emergency facilities”.
There is a legitimate case that the emergency policies adopted by the Fed in the short term and the time of panic in the dollar financing markets were in full swing. While the pandemic is still raging in the United States, the state of the economy and financial markets is very different from that in March. The corporate winners and losers of the pandemic became clear, reducing the argument for a blanket financial support to all. A potential vaccine has made investors happier to buy riskier assets and less need for the Fed to act as a “last resort dealer” by providing liquidity to corporate borrowers.
The announcement also about the magnitude of the Fed’s commitment to supporting dollar liquidity seemed to have a greater effect on ending market dislocation during the initial pandemic wave than the direct effect of policies. Downloading real schemes is limited. A greater holistic approach to US monetary and fiscal policy is really needed now that the pandemic is entering a new phase.
However, the argument of Mr. Mnuchin that the schemes need to be completed to release stimulus funds was made with bad intentions. The United States is not limited in any way in its ability to fund new spending. Instead, the barrier to further fiscal support is a stalemate in Congress, with both Democrats and Republicans fighting for party supremacy ahead of Georgia’s second-round Senate election.
The move appears to be a political tactic to appoint a new US president for its own confrontation with Congress. While Biden will be able to restart the facilities without congressional approval using the Treasury Stabilization Fund, this will cover only part of their original size. There may be better ways to support the US economy that put more emphasis on fiscal policy and improve bankruptcy procedures, but the completion of monetary measures will have to wait until they are in place.
There have been successful presidential transitions in times of crisis. The George W. Bush administration worked with new President Barack Obama to stabilize the financial system during the 2007-08 financial crisis. The fact that Mr. Mnuchin and President Donald Trump are unable to put aside party scoring in the national interest is an example of why millions of Americans have rejected Mr. Munchin’s request. Trump for a second term.
Most importantly, however, it is a tragedy for millions of Americans and businesses that need support from their government.