The Treasury wants its money back. The Fed would rather it didn’t.

The FT reports that the US treasury has decided not to extend a variety of emergency lending facilities that the Federal Reserve had set up following the Covid crisis. The US Treasury had been backstopping the Federal Reserve’s lending, guaranteeing them against losses, but now wants the allocated funds back. The facilities to be cut include the “Main Street Lending Program,” where the Fed lends to medium sized businesses (novel policy!).

There has been a lot of anger at the decision, including a rare response from the Fed itself, arguing the programs are important while the economy is vulnerable. While I agree that withdrawing support at this time is lunacy, its worth noting that very little of the funds have been used, as this graph from the FT’s article shows:

In the case of the Fed’s facilities to support money markets, their limited use makes sense given how quickly financial markets have rebounded (in part also thanks to the massive QE since March). ‘Main Street’ on the other hand has been struggling, and I cannot help but wonder if the limited take-up of both the MLF and the MSLF are signs the programs were overly restrictive.

Its certainly bad policy that these programs are being cut in the middle of a crisis, but we also need to ask why they were not being used in the first place and whether that was also a policy failure. If i had to venture a guess I suspect it would have something to do with the Fed being risk averse given the political implications of both the MLF and the MSLF.

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