A Treasury-Fed battle leaves markets as the loser
By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets
On Thursday evening, US Treasury Secretary Mnuchin sent a letter to Jerome Powell, the Chairman of the Federal Reserve. This was not a friendly pen-pal like communication. Mnuchin is refusing to renew some of the Fed’s crisis lending facilities and wants the Treasury to return some of the unused money. This can be interpreted cynically or optimistically.
Powell seems to have been initially cynical regarding Mnuchin’s motives, as he immediately replied stating that they still believe that the full toolbox is needed. This spat marks a rather rare disagreement between the two men, who have worked relatively well together throughout this crisis. The Fed has now backed down and agreed to Mnuchin’s requests, but it sounds like a rather begrudging concession.
The facilities being cut are those that allowed the Fed to buy corporate and municipal debt, extend loans to medium-sized businesses, and to support asset-backed securities. While these are not necessarily the most powerful tools available, they have been useful this year for preventing some volatility.
The cynical interpretation of these events is that Mnuchin as an extension of President Trump is doing all he can to burn down the system before Biden becomes the President. This is possible, but it would serve as a complete reversal of Trump's laser-like focus on the stock market. It was obvious that investors would not take this news well.
The optimistic view is to assume that Mnuchin is being honest and is trying to fund further stimulus measures without resolving the current stalemate in Congress. If true, this would be positive and it is arguably a better use of the money.
I do not often find myself agreeing with any ally of President Trump, but in this case, if he is being honest, Mnuchin could be right. The Fed facilities can be refunded at any point without approval from the Congress if they are needed. The financial markets are stable and US stocks are on for their best November ever. This does not seem like a time for these unprecedented measures to be in place. This money would be better spent on the US economy — on those hurting the most. The market will fall — yes — although it is hard to know what will happen on Monday in this rather unpredictable year. Even if there is a sell off, it would not be a bad thing.
For now, Mnuchin deserves a little trust; this money will hopefully end up in the hands of those that need it most and if the markets fall as a result, then so be it. Investors can give a little to help out the economy. If credit markets do start to fail, then Mnuchin would presumably move to refund the needed programmes. Until we have evidence suggesting that he will not, we should not assume the worst.
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