US Treasury Department and Federal Reserve argue about Corona aid

The debate was triggered by a letter from Treasury Secretary Steven Mnuchin to Federal Reserve Chairman Jerome Powell on Thursday evening. In the letter, he calls for some of the corona emergency programs launched by the Fed to be phased out. Mnuchin wants to use the funds released elsewhere in the corona crisis. Mnuchin said the economy no longer needs additional credit at this point, but rather direct grants or guarantees.

The Federal Reserve sees it differently and opposes Mnuchin’s demand. She is in favor of allowing all emergency programs launched in the Corona crisis to continue for the time being. These programs are about loans to small and medium-sized companies or the purchase of municipal securities to support cities and municipalities in the crisis. The regional Fed chairman in Chicago, Charles Evans, described Mnuchin’s decision on US television as disappointing. The Fed’s emergency programs are an important safety net in the crisis.

Mnuchin countered Evans’ remarks. Also on TV, he said Evans should read the bill or speak to Fed Chairman Powell. It had been determined from the start that the Fed’s public funding would no longer be available at the end of the year. Criticism of the decision ignores the topic. Even without the expiring programs, the Fed would have sufficient firepower to dampen the economic effects of the corona crisis.

Mnuchin also alluded to the fact that a large proportion of the available funds were not called upon. This criticism is not new: the Fed has long had to justify the fact that some of the aid programs are rarely used. The Fed, however, regards this as a success of its rescue policy, as it believes the programs have helped calm the situation.

The Treasury Department had backed the Fed’s aid programs with substantial financial resources. This happened not least for the reason that the Fed would otherwise have been prohibited from taking any action, at least in some areas. Finance Minister Mnuchin could use the money released – according to Mnuchin it should be around half a trillion dollars. Negotiations on a new stimulus package have been stuck in the US parliament for months.

Public debates between the Treasury Department and the Federal Reserve are extremely rare in the United States. Usually, especially in times of crisis, the two institutions work closely together to avert damage to the economy. In the Corona crisis, the ministry and the Fed have moved particularly closely together, which has also drawn some criticism. After all, economists do not like to see a too close connection between financial and monetary policy due to the conceivable risk of inflation.

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