Yellen at Treasury could resuscitate Fed’s loan programs
WASHINGTON — President-elect Joe Biden’s selection of Janet Yellen to be Treasury secretary increases the odds the government will double down on pandemic recovery efforts, which include lending programs that enable banks to provide credit to households and businesses.
If confirmed, Yellen — a former head of the Federal Reserve — would inherit a shaky economy rattled by the coronavirus pandemic and growing division between Treasury and the Fed about how the recovery should proceed.
After Treasury Secretary Steven Mnuchin essentially ordered the central bank to shut down credit backstops such as the Main Street Lending Program, many experts expect Yellen would work with Fed Chair Jerome Powell immediately to revive its emergency lending programs and would even try to convince Congress that those programs need more fiscal support.
“Both Powell and Yellen believe that it's good to have a full toolbox, and that having those programs available is helpful even if you don't end up using them,” said Ian Katz, a director at Capital Alpha Partners.
Mnuchin last week called on the Fed to let programs meant to limit the economic effect of COVID-19 expire at the end of the year and return unused funds appropriated by the Coronavirus Aid, Relief and Economic Security Act to backstop the facilities.
After the Fed initially resisted, saying it preferred "that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role," Powell later relented and said in a letter to Mnuchin that the central bank would return the money.
That means five programs, including the Main Street Lending Program and the Municipal Liquidity Facility, will shut down on Dec. 31. The $600 billion Main Street program provides banks financial backing to make loans to midsize firms meeting certain criteria that need pandemic relief. But the program has been criticized for a slow start and limited participation by banks and borrowers.
Brian Gardner, chief Washington policy strategist at Stifel, argued in a research note that replenishing the emergency lending programs will be one of Yellen’s top priorities once she is confirmed.
“Yellen's first matter of business will be to not only provide additional COVID-relief funding but to reestablish additional, temporary [Exchange] Stabilization Fund support that Treasury can provide to backstop Federal Reserve funding programs,” he said.
Yellen, who would be the first woman to lead Treasury, could leverage her relationships with Powell and lawmakers on both sides of the aisle to achieve robust economic stimulus, which could include revamped emergency lending facilities.
She differs from Mnuchin and other Treasury chiefs since she doesn't hail from the financial sector. Before becoming Fed chair in 2014, Yellen held posts as a governor on the Fed board, the head of the Federal Reserve Bank of San Francisco and an economic adviser in the Clinton administration. Since leaving the central bank in 2018, she has been a fellow at the Brookings Institution.
“She knows the banking system. She knows the economy. She's very well versed in what the issues are, and I think she's going to hit the ground running,” said Gilbert Schwartz, a partner at Schwartz & Ballen and a former Fed attorney. “I think she'd be a terrific choice.”
Yellen could potentially be confirmed even before Biden is inaugurated Jan. 20, said Jaret Seiberg, an analyst with Cowen Washington Research Group. That would set the stage for another round of economic stimulus shortly after Biden takes office, and renewed life for several of the emergency lending facilities the Fed has stood up under section 13(3) of the Federal Reserve Act.
“We believe the Yellen pick increases the prospects that the Federal Reserve in late January will launch 13(3) emergency loan facilities to boost the economy,” Seiberg said in a research note. “That could get low-cost credit into the economy.”
Powell, who was a Fed governor when Yellen served as Fed chair, had said earlier this month that he didn’t believe it was the right time for the central bank to pull back on the facilities, a sentiment that has been echoed by several of his colleagues.
“I think an important question to ask is, in the middle of a second wave of a pandemic, when financial markets frequently are quite volatile at the end of the year anyway, is this the time to have a hard stop on our facilities?” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Nov. 10 interview.
Sen. Pat Toomey, R-Pa., who would likely chair the Senate Banking Committee if Republicans retain control of the Senate, has indicated that Yellen’s position on the emergency lending facilities funded by congressional appropriations will be front and center. (Toomey also sits on the Senate Finance Committee, which holds hearings to examine nominees for Treasury secretary.)
“As the Senate considers her nomination, I look forward to discussing with her a variety of issues, including the legal requirement for CARES Act-funded temporary emergency lending facilities to shut down by year-end and remain so, absent further congressional action,” Toomey said in a statement.
Proponents of closing the five Fed facilities funded with money from the CARES Act argue that Congress did not intend for the programs to be extended, and that several of the programs have garnered little interest anyway. So far, only two issuers have tapped the Municipal Liquidity Facility, and the Main Street Lending Program has purchased just over $5.2 billion in loans as of Nov. 13 — a fraction of the program’s size.
In the letter Mnuchin wrote to Powell last week requesting that the Fed return unused funds from the CARES Act, Mnuchin said that “in the unlikely event” it became necessary to restart any of the facilities that will close Dec. 31, the Fed can request approval from Treasury. (The Dodd-Frank Act requires that the Treasury secretary sign off anytime the Fed wishes to flex its emergency lending powers.)
Although the Fed doesn’t require any investment from Treasury to stand up a facility, it has suggested that investments from Treasury’s exchange stabilization fund are necessary in order to protect the central bank from losses. While Mnuchin does not appear to be inclined to make any more investments into the Fed’s facilities, Yellen may have a different view.
“I think Yellen will work with Powell and they will be on the same page to do what they can do to stimulate the economy, so if Powell tells her he would like ESF money, I expect she would go along with it,” said Katz.
However, Yellen may be limited in the investment Treasury would be able to make. Bloomberg reported Tuesday that Mnuchin is planning to put the unused money returned by the Fed into the department’s General Fund instead of back into the Exchange Stabilization Fund, which Yellen would be unable to tap without the permission of Congress. That would leave just about $80 billion in in the ESF.
Schwartz cast doubt on a Biden administration restart of the facilities set to close at the end of the year.
“All of a sudden, having a new administration come in and try to recast them, it seems to me would be difficult to do, and potentially too disruptive to what people's expectations are, so I don't think you're going to see significant revamping of any of these facilities,” he said.
Such a move could also receive pushback from Senate Republicans like Toomey who want to see the programs sunset.
Though it’s possible Congress could appropriate more money to the Treasury to backstop the Fed’s emergency lending facilities after Biden is inaugurated, it’s unlikely, said Katz.
“Republicans would make the case that the money isn't needed, and wasn't used much when it was available, and even Democrats would want to put conditions on the programs,” he said. “I think Congress only really opens the purse strings if the economy takes a dramatic turn for the worse.”