The Data Have Spoken

Eakinomics: The Data Have Spoken On Tuesday, Federal Reserve (Fed) Chairman Jerome Powell and Treasury Secretary Steven Mnuchin made a joint appearance before the Senate Banking Committee (with an encore yesterday at the House Financial Services Committee). Predictably, a point of contention was Mnuchin’s November 19 announcement that the temporary lending facilities that the Coronavirus Aid, Relief, and Economic Security (CARES) Act created at the Fed would lapse as scheduled on December 31. Ranking Member Sherrod Brown was pointed in his criticism, saying that the president and Secretary Mnuchin “appear to be trying to sabotage our economy on the way out the door.” When Eakinomics went over this territory, I argued, “As the Mnuchin letter makes clear, market conditions are much better now. Volumes have returned to pre-COVID levels and spreads are nearly back to their previous levels. It is far from obvious that markets need even the promise of the existence of these facilities. Of course, if spreads widen on the announcement that the facilities will lapse, Mnuchin has time to reverse course. The data can decide this one.” The data have decided. There is no need for the facilities. The graph below shows the spread between BBB corporate securities and Treasuries from January 1, 2019, to December 1, 2020. The sharp spike, peaking on March 23, 2020, is a clear indicator of the market distress as the pandemic exploded. The Fed argues that the mere announcement of the facilities existence served to generate confidence and the spreads quickly dropped. If the liquidity facilities were still needed, then the announcement of their cessation should have had the opposite effect and caused spreads to rise. Instead, spreads remain on a mildly downward trajectory. The data have decided the issue. This is exactly the position articulated by Senator Pat Toomey in the hearing: One argument “was that the viability of the credit markets depends on these backstop facilities. Well, that's clearly been disproven by the fact that the announcement of their end brought absolutely no disruption to any financial markets that I can tell at all.”