The US Treasury vs. the Fed: Who’s Really in Charge?
There is something brewing in the nation’s capital, and it has been since Congress unconstitutionally gave power of the nation’s money supply to the Federal Reserve over a hundred years ago. While the tension has existed since, it’s a great opportunity to watch the friction unfold.
On November 19 Secretary Mnuchin wrote a letter to Fed chair Powell asking that five asset purchase programs, including the corporate bond and municipal bond purchase programs, to expire on December 31, as intended by Congress. He also instructed that:
As such, I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.
“Nothing is more permanent than a temporary solution.” We have previously expressed our concerns that these “temporary” asset purchase programs would never end. Consider instances such as the European Central Bank’s corporate bond buying program, launched four years ago, or the Bank of Japan’s equity program running for over a decade, and how both appear to have no end in sight. While only a few of the Fed’s programs, like the Paycheck Protection Program are to be extended for ninety days. However, this time, we may be able to give some credit to the secretary for wanting to stop most of the programs; after all, if these temporary measures don’t have a set end date, they could become permanent as well. He reiterated his stance:
While portions of the economy are still severely impacted and in need of additional fiscal support, financial conditions have responded and the use of these facilities has been limited.
The following day, Fed chair Jerome Powell wrote a reply to Mnuchin acknowledging the secretary’s authority:
The CARES Act assigns the Treasury Secretary sole authority to make certain investments in Federal Reserve emergency lending facilities… You have indicated that the limits on your authority do not permit the CARES Act facilities to make new loans or purchase new assets after December 31, 2020, and you have requested that we return Treasury’s excess capital in the CARES Act facilities.
So far so good…until this happened; ABC News writes:
The Fed issued a rare public rebuke in a statement, 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."
This might not come as a surprise. Powell has recently made various statements in which he suggests Congress increase the fiscal stimulus. Comments from the Fed chair normally amount to little more than “suggestions,” as the Fed cannot direct treasury spending. However, this “rebuke” seems a little more than a passing comment normally answered in a Q & A session.
Of course, where does this leave the fate of these temporary asset purchase programs?
Enter Janet Yellen, the 2014–18 Fed chair who preceded Jerome Powell, may soon replace Mnuchin as secretary if confirmed by Congress. If she becomes the first female to hold the position, she will have the ability to either continue with the existing directive from Mnuchin to end the temporary facilities or she can agree to the request made from Powell.
Time will tell. But currently, it doesn’t look good for those who long for a return to sound money, as just last month on Bloomberg Television she made an appearance saying:
“While the pandemic is still seriously affecting the economy we need to continue extraordinary fiscal support, but even beyond that I think it will be necessary,” Yellen said…“We can afford to have more debt,” she added, because interest rates will probably be low “for many years to come.”
In the Constitution, Congress was charged with managing the nation’s money supply. At the turn of the century, they practically outsourced this role to the Federal Reserve Banking system. Over the last few decades, and related crises, the Federal Reserve managed to use the powers granted by Congress, to acquire more assets, commensurate with an extraordinary increase in supply of money and credit. The lines between the Treasury and the Fed, who directs whom, and who controls what gets blurrier by the day; having the previous monetary policy head sitting at the top of our fiscal policy does nothing to make this distinction any clearer.