MNI EXCLUSIVE: Fed May Extend Facilities as Fiscal Talks Stall

The Federal Reserve will likely prolong emergency programs past their set end date of late December, current and former officials told MNI, citing concerns over coronavirus, the small cost of keeping facilities open, and a lack of more fiscal relief.

Take-up of the so-called Section 13(3) facilities has totaled USD93 billion, a fraction of the USD2.6 trillion of lending the Fed said it would provide to companies and funds under "unusual and exigent circumstances." Fed officials credit the programs for supporting confidence even if they aren't used much, and sources told MNI keeping them in place should reassure investors that smooth market functioning will be sustained.

"Those facilities will be extended no matter what. Those are emergency facilities and the emergency is not gone," said Roberto Perli, former Fed Board economist now at Cornerstone Macro. "Covid is still around, and I would expect that they would be extended under any fiscal circumstance."

The "Main Street" and municipal lending facilities should be extended "as far as they can into 2021," said Bharat Ramamurti, who sits on Congress's oversight committee charged with overseeing the 13(3) programs created by the CARES Act.

"If a fiscal deal falls apart in Congress then it's even more important that the facilities could become more generous," Ramamurti said. "These programs should be extended to provide the economic stabilization that they are supposed to be delivering."

BIDEN MAY EXPAND

A joint decision by the Fed and the Treasury is required to extend the programs, eight of which are set to be terminated in late December. Treasury Secretary Steven Mnuchin has shown reluctance to open up the programs further, saying this week he's "not going to need" the USD259 billion in unused CARES Act funds that were to help leverage the 13(3) programs. Mnuchin wants use that money for direct stimulus instead.

Joe Biden would likely expand Main Street and muni facilities, a person close to Biden's advisors told MNI, reflecting the prerogatives of a new Treasury Department seeking to lower borrowing rates and lengthen loan terms.

Main Street loans have been shunned by business owners unsure if they can avoid bankruptcy through a prolonged pandemic. The program has supported only USD2.5 billion in loans compared to a possible USD600 billion. Likewise, the Municipal Liquidity Facility has supported two loans totaling USD1.7 billion compared with a possible USD500 billion.

Even in a downturn where banks have escaped most of the damage, former Fed officials say it's best to keep financial system supports in place.

EVENTUAL SUNSET

"The longer this goes on the more strains financial institutions come under," said Jonathan Wright, a former Fed Board economist now at Johns Hopkins University. "I wouldn't really expect the Fed to close the primary dealer credit facility down."

The Fed's controversial corporate debt purchase program is also likely to continue, at a minimum serving an effective backstop role if market conditions deteriorate, Wright said. The Fed has purchased declining amounts of corporate debt in the secondary market now totaling USD13 billion, and its primary market corporate program has yet to make any loans.

The Fed will not close the programs "prematurely and we acknowledge we're in the middle of a crisis right now," Dallas Fed President Rob Kaplan said at a Hoover Institution event this week. But "we need to be clear that the 13(3) programs will sunset" eventually.