The Fed vs. the Treasury

By Matthew Klein |  Friday, November 20 Fed v. Treasury. The traditional argument for an independent central bank is that politicians, left unchecked, will always try to boost the economy so they stay popular and get reelected. The short-term gains would come at the cost of longer-term inflation risk. Thanks to the recent conflict between the Federal Reserve and Steven Mnuchin’s Treasury Department, we now have another reason to keep the monetary authority protected from political interference: lost elections. Late on Thursday, Mnuchin announced that he wanted the Federal Reserve to shut down several of its pandemic-era emergency lending programs, including the Main Street facility aimed at small to midsize businesses and the Municipal Liquidity Facility. Moreover, Mnuchin wants the Fed to return money that had been appropriated by Congress to support those facilities to the Treasury. This was a surprise to the Fed, which initially responded by saying that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Today, Federal Reserve Chairman Jerome Powell sent a letter to Mnuchin pledging that the central bank “will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination.” The incoming Joe Biden administration, which won’t be able to reverse the decision until a new Treasury Secretary is installed in more than two months, isn’t happy. They characterized the decision as an “attempt to prematurely end support that could be used for small businesses across the country when they are facing the prospect of new shutdowns is deeply irresponsible.” Investors don’t seem happy with the impasse either, with the S&P 500 index falling 0.7% on the day. Every sector of the index, except for utilities, was down, while utility shares were only up 0.02%. Yields on U.S. Treasury debt were also down, while precious metals prices were up. The yield on the 30-year bond had its biggest weekly drop since mid-June. So far, the concern seems confined to the U.S., since European, Chinese, Korean, Indian, and Canadian stocks were all up on Friday. The big winner was copper, which gained 2.8% and hit its highest level since February 2014. Copper tends to reflect conditions in China more than anything else, so it suggests the industrial and construction-led recovery there is continuing apace. Oil and gas prices also rose, which suggests that investors haven’t yet lost their optimism about the global recovery with multiple vaccines on the horizon. Watch our TV show on Fox Business Friday at 10 p.m. or 11:30 p.m. ET; Saturday at 10 a.m. or 11:30 a.m.; or Sunday at 7 a.m., 10 a.m., or 11:30 a.m. This week, get insights on the market outlook from Ed Yardeni, president of Yardeni Research. Plus, see an interview with Chris Dyer, director of global equities at Eaton Vance and a member of this week’s Barron’s International Roundtable.