Are they needed?
The emergency lending facilities were vital in calming jittery markets in March and April. Mnuchin agreed to extend a minority of them, including for commercial paper and money market mutual funds -- both key parts of the financial system’s plumbing -- underscoring the importance of at least some backstops.
But the Main Street Lending Program for smaller businesses has had trouble finding lenders and borrowers alike, and the corporate-bond programs have had little to do of late.
“The take-up in 2020 so far has been underwhelming,” Wharton professor Peter Conti-Brown pointed out in a Tuesday blog post for the Brookings Institution.
That said, economists and some central bankers have warned that there’s still a risk of a renewed economic contraction, with the potential for fresh credit strains alongside.
Do the facilities shut down completely?
No. The assets already lent out will remain in place. For example, the Main Street program has $5.3 billion in assets that will stay in place. But those being sunsetted will not be able to make new loans.
Does the Fed have to return the money not yet allocated?
Yes. Fed Chair Jerome Powell said on Friday that the Fed would send the money back, given that the Treasury chief has ultimate authority over the funding.
What is Yellen expected to advocate for?
Wall Street economists, including some who worked at the Fed when Yellen was there, said she is likely to remain flexible. The corporate bond markets, which are functioning well, may not be a high priority, and fighting Senate Republicans on that could burn up both time and political capital.
Seth Carpenter, a former deputy director in the Fed Board’s policy strategy unit, said reinstating the municipal, corporate-credit and small business facilities depends importantly on how the economy evolves.
Given that use of the municipal and Main Street Lending Facility is relatively low, Yellen may also want to consider if the Fed is the right place for such programs in the first place, he said.
“The underlying question is, did they have the right structure to address the issues they needed to address?” said Carpenter, who is now chief U.S. economist at UBS Group AG in New York.
The Fed used to have broader emergency authority to extend credit, but that was significantly curtailed in the wake of the unprecedented actions it took in the 2007-09 financial crisis. The Dodd-Frank financial reforms of 2010 left the central bank with limits on what it can do. Some of the actions it took back then would need approval by the Treasury secretary.
The Fed can still lend directly to banks through the discount window, and it can swap dollars for foreign currency to any foreign central bank without Treasury approval.
With backing from the Yellen Treasury, the Fed could also resurrect emergency lending facilities or establish new ones using funds from outside the Cares Act. And there’s just under $80 billion in the Treasury’s Exchange Stabilization Fund.
What does the Fed want?
Powell’s stated preference was to keep all facilities open. A central banker typically wouldn’t call the end of an emergency with a new wave of contagion spreading through the country even if markets were functioning well.
He called the recovery “incomplete” in a Nov. 17 conference, and said the time to close them was not “yet or very soon.” He noted in last week’s response to Mnuchin that Exchange Stabilization Funds were available to the Treasury secretary should a Fed facility need a backstop. A Fed spokesperson declined further comment Tuesday.
This article was provided by Bloomberg News.