As Treasury secretary, Janet Yellen is almost certain to pursue tighter coordination with the U.S. Federal Reserve next year -- repairing recent frictions -- though observers say she will be careful to avoid any specific move that could trigger a wave of Republican protests.
President-elect Joe Biden’s pick for Treasury was at the Fed for the better part of two decades, and saw first-hand how vital the cooperation of the two agencies is to ensuring the flow of credit amid stressed economic times.
Step one, after winning Senate confirmation, will be deciding how to proceed with several emergency Fed lending facilities backed by Treasury money and authorized by Congress through the Cares Act, after outgoing Treasury Secretary Steven Mnuchin announced he would sunset them by year-end.
Yellen will need to make a call on whether she has the legal authority to resurrect the programs, which the Fed said it wanted to extend. The question was made tougher by Mnuchin’s latest plan to put unused Cares Act money into the department’s general account, over which Congress has authority.
Both of Mnuchin’s moves have prompted strong partisan reactions, showcasing the charged political atmosphere that Yellen will be entering in her new role. With financial conditions easing amid record stock highs on Wall Street, it could afford her the space to put off any change in direction, as she also attempts to persuade Congress to enact a new fiscal stimulus package.
“The immediate need for some of these facilities certainly has subsided,” said Michael Gapen, chief U.S economist at Barclays Plc in New York and a former Fed Board economist. Yellen is “likely to wait and see if there is a vulnerability” that shows up in financial markets, he said.
Here some issues and questions about the facilities.
What’s the Current Plan?
Mnuchin last week said five Fed facilities must sunset at the end of next month, and asked for the central bank to return unused funding. On Tuesday, the Treasury said it plans to move that unspent money into its general account -- from where it cannot be released without congressional approval. Congress had authorized those funds to go into the Treasury’s Exchange Stabilization Fund, over which the secretary otherwise has substantial discretion.
Mnuchin said his intention was to make the money readily available to Congress to be used for helping small businesses and unemployed Americans, arguing that grants were better than loans for distressed parts of the economy.
What about the politics?
Democrats have charged Mnuchin with trying to hamstring the incoming administration’s ability to address a flagging economic recovery amid the resurgence of the coronavirus.
The Biden transition team last week called Mnuchin’s clawing back of unspent money from the Fed “deeply irresponsible.” Congressional Democrats said the money ought to have been left in place.
Republicans underscored Mnuchin’s argument that the facilities had done their job. Record corporate bond issuance has shown that businesses have ready access to capital markets.
Senator Pat Toomey, a Pennsylvania Republican and member of a congressionally appointed watchdog panel overseeing Fed and Treasury Covid-19 programs, signaled a warning against any move by Yellen to restart the funding of Fed facilities.
“I look forward to discussing with her a variety of issues, especially the legal requirement for Cares Act temporary emergency lending facilities to shut down by year-end and remain shut down, absent further congressional action,” Toomey said.