Treasury Secretary Steven Mnuchin said his agency and the Federal Reserve have enough firepower to continue to support the economy, a day after calling for several emergency lending programs to be sunsetted by the end of the year.
“Markets should be very comfortable that we have plenty of capacity left,” Mnuchin said Friday on CNBC. He said he was “merely, simply following the intent of the law. It was not a decision on whether we needed these or didn’t need this.”
Financial markets for now suggested Mnuchin’s take was right. The S&P 500 Index saw a modest retreat Friday morning, down 0.2% as of 10 a.m. New York time, while a gauge of U.S. credit risk ticked higher. Cruise operator Carnival Corp. — which has been walloped by the Covid-19 crisis — proceeded with selling bonds without collateral, showcasing that the issuance market remains open.
Even so, Fed officials expressed disappointment, highlighting that even if unused, the facilities that will no longer be able to purchase assets served a useful role as a backstop.
“That backstop role might be important for quite some time, so it’s disappointing,” said Federal Reserve Bank of Chicago President Charles Evans. “The virus spread is increasing, so there are risks from that,” he said on CNBC Friday.
Atlanta Fed President Raphael Bostic similarly said late Thursday on Bloomberg TV that “it’s prudent to keep those things open so that when people, if they do have stress, they can draw upon it.”
UBS Group AG aligned with that perspective, and predicted that U.S. credit markets would deteriorate as a result of the pullback of the Fed facilities that went to support corporate bonds.
“We view the Fed backstop as a material pillar of support,” UBS strategist Matthew Mish wrote in a note to clients Friday. “The backstop has been a key driver of inflows, which we think will stall on the news,” he said, boosting his year-end forecast for high-yield bond premiums by half a percentage point.
The Markit CDX North American Investment Grade Index climbed 2.8 basis points to 56.7 basis points, prices compiled by Bloomberg show. The index has plunged from as high as 159 basis points at the peak of the market turmoil in March.
News of the sunsetting of five Fed facilities backed by Treasury funding came with a letter from Mnuchin to Fed Chair Jerome Powell released on Thursday. Mnuchin did ask for a 90-day extension for four of the central bank’s programs, including those backing commercial paper — a vital short-term funding tool for companies — and money market mutual funds, another crucial element of the financial system.