The US Treasury’s unnecessary fight with the Fed

Usually when the US Treasury clashes with the Federal Reserve it seeks looser monetary policy in the face of the central bank’s determination to choke off inflation. That these positions are reversed is not even the most extraordinary feature of outgoing Treasury secretary Steven Mnuchin’s decision to reduce the firepower behind some of the Fed’s crisis-fighting measures. Instead it appears an attempt to salt the earth before the inauguration of president-elect Joe Biden, by setting him up for a fight with a deadlocked Congress if these policies are needed again.

On Thursday, Mr Mnuchin, in a letter to Fed chair Jay Powell, called for the central bank to return $415bn of unused funds that Congress provided to backstop the Fed’s emergency lending facilities. This will bring to an end a set of policies designed to support corporate bond markets, lending to medium-sized business, state and local bonds and the asset-backed security market. Mr Mnuchin extended policies designed to help ease short-term funding for 90 days. The central bank replied, in a statement, that it would prefer having access to “the full suite of emergency facilities”.

There is a legitimate case that the extraordinary policies adopted by the Fed at short notice and a time of panic in dollar funding markets have run their course. While the pandemic is still raging unabated in the US, the state of the economy and financial markets is very different from what it was in March. The corporate winners and losers of the pandemic have become clear, reducing the argument for blanket financial support to all. A potential vaccine has made investors happier to buy riskier assets and there is less of a need for the Fed to act as a “dealer of last resort” providing liquidity for corporate borrowers.

The announcement, too, of the size of the Fed’s commitment to supporting dollar liquidity appeared to have a greater effect on ending market dislocation during the initial wave of the pandemic than the direct effect of the policies. Uptake of the actual schemes has been limited. A more holistic approach to monetary and fiscal policy in the US is genuinely needed now that the pandemic is entering a new stage.

Yet Mr Mnuchin’s argument that the schemes should end to free up funds for stimulus is made in bad faith. The US is not constrained in any way in its ability to finance new spending. Instead, the barrier to further fiscal support is congressional deadlock, with both Democrats and Republicans jostling for partisan advantage before Senate run-off elections in Georgia.

The move appears a political tactic to set up the new US president for his own conflict with Congress. While Mr Biden will be able to restart the facilities without congressional approval by using the Treasury’s Exchange Stabilization Fund, this will cover only a fraction of their original size. There may be better ways of supporting the US economy that put more emphasis on fiscal policy and improving bankruptcy procedures, but ending monetary measures should wait until they are in place.

There have been successful presidential transitions at times of crisis. The administration of George W Bush worked with incoming president Barack Obama to stabilise the financial system during the 2007-08 financial crisis. That Mr Mnuchin, and President Donald Trump, are unable to put aside partisan point-scoring in the national interest is an example of why millions of Americans rejected Mr Trump’s bid for a second term.

Most importantly, however, it is a tragedy for the millions of US citizens and businesses who need their government’s support.

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