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Fed spat raises fears Trump wants to ‘burn the house down’

Late last week something unusual, indeed probably unprecedented, occurred. The US Federal Reserve Board publicly disagreed with a decision by the US Treasury Secretary, Steve Mnuchin, instructing the US central bank to return all unused funds in the emergency loan facilities the US put in place when the pandemic caused turmoil in financial markets.

The funds are part of a $US454 billion ($620 billion) congressional appropriation that was a key element of the US response to the pandemic. They effectively underwrite any losses the Fed might incur from loans made to small businesses, companies and municipalities.

While only a very small number of loans – about $US25 billion have been made via the facilities – their existence is regarded as having played a major role in calming the markets when they were engulfed by panic in March as the severity of the coronavirus threat became clear.

Donald Trump seems to be doing everything in his power to make sure the incoming Biden administration is a failure.Credit:AP

Subsequently, markets settled, credit markets reopened, the cost of credit fell and the stress in bond markets disappeared. The existence of the facilities is credited as having played an important role in reassuring the markets and borrowers that the Fed had their backs.

Mnuchin, while requesting extensions for some other emergency facilities, said he believed the US Congress intended the funding to expire on December 31. He also said the programs had clearly achieved their objectives.

Others disagree with both those assessments and see the decision as political in an environment where the Trump administration appears to be doing everything it can to undermine the incoming Biden administration and constrain its ability to govern effectively.

The Fed itself, in a most unusual statement, made it clear that it doesn’t agree with Mnuchin.

“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,” it said in a statement.

Subsequently, perhaps after “discussions” with the Treasury Secretary, it backed away and said it would work with him to arrange the return of the unused funds.

A number of Wall Street figures, and the US Chamber of Commerce, agreed with the Fed that the funding shouldn’t be removed. With COVID-19 infections and death rates soaring in the US, unemployment rising again and the reintroduction of virus-related measures to curtail social and economic activity, the US financial markets and economy remain vulnerable.

The Fed’s chairman, Jerome Powell, had said as much earlier in the week, before Mnuchin’s decision, saying he didn’t think it was yet appropriate to let the programs expire. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away,” he said.

Once the funds are returned it would require congressional approval to re-fund the program whereas, because the Treasury loans to the Fed were already in place, the facilities could have been extended without congressional involvement.

If the Trump administration is working on the assumption that the Republicans will retain control of the Senate, which is likely but not certain, the return of the unused funding would limit the ability of the Biden administration to use the funds to support businesses and cities ravaged by the pandemic.

While Mnuchin denied the decision was politically driven, that’s not the way Democrats, or some in the markets, see it, variously labelling it “economic sabotage,” a “salting of the earth” and “burning the house down”. The Biden transition team described it as “deeply irresponsible”.

While the Fed did back away from a confrontation, the rift between the two most powerful economic and financial agencies in the US caused some disquiet in markets which regarded the funding in similar terms to the Fed’s – as a backstop against the prospect of another bout of panic in credit markets.

Against the backdrop of the worst wave of the pandemic in the US, the Trump administration is scrambling to lock in decisions before Biden can take office.

There’s also the concern that the Trump administration, with its unprecedented attempts to overturn the results of the presidential election, or at least the credibility of the votes and legitimacy of the Biden administration, is bent on ensuring that the incoming administration is a failure.

That might be with an eye to the mid-terms in 2022 or the 2024 election when it is conceivable that Trump might run again, or use the devotion of his base and his control of the party to support one of his children or at least to determine the Republican nominee.

Against the backdrop of the worst wave of the pandemic in the US, the Trump administration is scrambling to lock in decisions before Biden can take office.

US Treasury Secretary Steve Mnuchin.Credit:AP

Whether it is drilling for oil in Alaska and national parks, withdrawing troops from Afghanistan, escalating tensions with Iran, adding more sanctions against China, returning mortgage giants Fannie Mae and Freddie Mac to private ownership, weakening environmental standards or appointing more judges, the motivation appears to be to undermine the Biden administration’s ability to act.

Most significantly, there has been no movement on a new congressional relief and stimulus package even as the last of the emergency efforts put in place earlier this year are set to expire at the end of next month. The Democrats are sticking with their $US2 trillion-plus plan while the Republicans only want to spend $US500 billion.

There has been no progress towards a compromise, even as the pandemic worsens and signs of economic stress are re-emerging in the US.

There were some signs that the markets were unsettled by the emergence of the spat between the US Treasury and the Fed late last week, perhaps because it was so unusual – there is no history of that kind of public divergence – but also because it points to the wider risks of a transition from Trump to Biden that is also without parallel and which is occurring at such a vulnerable moment for the US.

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