MANHATTAN (CN) — Optimism on Wall Street about two Covid-19 vaccine candidates was undercut by moves by the Treasury Department, which seeks to take back hundreds of billions of dollars in emergency spending by the year’s end.
Late on Thursday, Treasury Secretary Steven Mnuchin sent a letter to the Federal Reserve instructing it to return $455 billion in unused funds meant to prop up bond markets in the wake of the pandemic.
“The Federal Reserve facilities supported by the Treasury’s contribution of CARES Act funds have clearly achieved their objective,” Mnuchin wrote, citing recent bond spreads as evidence that the market had normalized and stating Congress should re-appropriate the funds. “While portions of the economy are still severely impacted and in need of additional fiscal support, financial conditions have responded and the use of these facilities has been limited.”
Markets did not seem to like the move, as the Dow Jones Industrial Average shed 100 points at the opening bell and more than doubled those losses by the closing bell, losing 219 points for the day, a 0.75% drop. The S&P 500 and Nasdaq also fell, by 0.6% and 0.4%, respectively.
Mnuchin spent Friday defending the move, saying that several lending facilities, including the central bank’s Paycheck Protection Program Liquidity Facility, would continue to operate. Speaking on Friday morning to CNBC, Mnuchin said the decision was “not a political issue” and that the funds were set to expire at the end of the year anyway.
“As the Fed has always said, these are emergency tools [and] when the emergency’s over, let’s put ’em away,” Mnuchin said. “Well, the medical emergency may not be over, but I think we’d agree the financial conditions are in great shape. Corporate bonds have come in, municipals have come in, mortgages have come in, the stock market has rebounded.”
He also noted Democrats initially had worried about giving him a blank check to spend money, and now some of them are now criticizing him for returning the funds to be used to help small businesses.
“The options are the options,” Mnuchin said. “Whether it’s myself or somebody else, these can be reactivated with exchange stabilization funds.”
The Fed may not agree, though. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the central bank said in a statement.
Many investors and analysts had credited the Fed with propping up markets with its various liquidity programs, as well as keeping interest rates low.
Technically, the Fed could use its Core Exchange Stabilization Fund to reestablish the lending facilities that expire at the end of the year. But some speculate the central bank’s firepower under those programs would be reduced tenfold.
“The emergency lending facilities have been little-used, but their existence has been key in ensuring a credible safeguard against financial market stress,” wrote Gregory Daco, chief economist at Oxford Economics. “With the Covid-19 crisis worsening and activity slowing in the absence of fiscal aid, the decision to curtail the Fed’s firepower could unsettle markets and exacerbate economic stress.”
Daco noted there would be risk to struggling small- and mid-sized companies, as their access to credit would be constrained, as would that of municipalities facing a budget crisis. “With partisanship in Congress preventing the delivery of urgently needed fiscal aid, and low rates negating any imminent debt servicing concern, Mnuchin’s justification appears poorly grounded,” he wrote.
That sentiment was echoed by Neil Bradley, chief lobbyist at the U.S. Chamber of Commerce, who predicted that ending the liquidity programs “prematurely and unnecessarily ties the hands of the incoming administration, and closes the door on important liquidity options for businesses at a time when they need them the most.”
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