Fighting the Fed
The Federal Reserve’s tussle with the White House was something to behold.
The stakes are high, but it was hard to resist eating popcorn while watching the Federal Reserve and the federal government square off last month.
The main card featured Treasury Secretary Steven Mnuchin, who informed the Fed that the Treasury Department would let most of the emergency lending facilities expire at the end of the year. Hours after that news, the Fed issued a rare public rebuke of the administration, arguing that the programs provide crucial support for an economy still struggling to recover.
The fisticuffs concerned the more prominent—and politically charged—special purpose vehicles (SPVs) including the Main Street Lending Program and the Municipal Liquidity Facility. In contrast, the Treasury seems to understand the importance of the Commercial Paper Funding Facility and the Money Market Liquidity Facility and actually asked the Fed to extend them through March 31, 2021 (which the central bank did yesterday). Even though these SPVs have seen little use since last March, their mere existence has instilled confidence in the liquidity sector. Allow me to say again that these facilities and other Fed moves in the depth of the crisis targeted the broad secondary markets, not just money funds.
Underlying the conflict was the frustration Fed policymakers have felt about the government’s inability to provide additional fiscal stimulus. Their position that the lack of support is hampering the economic recovery could hardly be clearer. We don’t expect a new package until after Biden’s inauguration. That’s unfortunate not only for Americans and businesses, but also for investors who would benefit from the bump in yields stemming from the increased supply of Treasuries.
While Congress failed the Fed on stimulus, it helped the central bank rebuff the White House by not advancing Judy Shelton’s nomination for a Fed governor position to a full Senate vote. While the move failed in large part because two senators likely to support her were in quarantine for Covid-19 and it is still possible a vote will take place, it is not clear the Senate has the time or the appetite for it. Her nomination has been controversial from the start because of her past advocacy for a return to the gold standard, her attacks on the Fed’s role in setting monetary policy and her questioning of the central bank’s need for independence.
Then a few days before Thanksgiving, Biden announced he had tapped Janet Yellen to succeed Munchin. Talk about a haymaker. Trump “fired” Yellen from her post as Fed chair early in his presidency. But she withstood it, reputation intact, to take an arguably more powerful position. For one, she no longer has to muster the support of a group of policymakers when making decisions.
Clouded in the dustup is how well the liquidity sector performed in November. Between the protracted results of the election and the surge in Covid-19 cases, uncertainty abounded, leading to some concern that the money markets would react adversely to it. Instead, they shrugged it off. Liquidity was abundant, yield spreads over corresponding Treasuries continued and outflows were in line with expectations. Attention now turns to year-end activity, but the moderate stress that can arise at this time seems quaint compared to what we endured this year—and certainly when measured against pressure in Washington.
The Treasury and London interbank offered rate (Libor) yield curves fluctuated slightly over the November before ending essentially where they were when the month opened. SIFMA was flat. We kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal.