The Fed Is Losing Some Key Tools as Treasury Takes Funds Back

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Northern Trust

  • In Washington, a relationship that seemed strong has apparently ruptured.  Throughout the year, The Treasury Department and the Federal Reserve worked closely to engineer stable markets and a durable economic recovery.  The Fed has been purchasing copious amounts of government debt to support relief programs, while the Treasury provided more than $200 billion of capital for a series of Fed programs that made over $1 trillion in credit available.
  • This week, however, Treasury Secretary Steven Mnuchin announced that the Treasury would be taking its money back at the end of the year.  The programs it supported are scheduled to sunset on December 31.  Fed officials have expressed disappointment at the decision.
  • To be sure, only a fraction of capacity in the Fed’s special lending programs has been used.  As an example, the Municipal Lending Facility (MLF) was designed to provide credit to state and local governments unable to access the capital markets on reasonable terms.  At the end of October, only two obligors had taken advantage of the program, borrowing a total of $1.65 billion.  The MLF has a ceiling of $500 billion.

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