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Lending Facilities the Focus on Day Two of Powell, Mnuchin Testimony

Lending Facilities the Focus on Day Two of Powell, Mnuchin Testimony

Izaac Brook, James Stanley,

Talking Points:

  • Termination of lending facilities may pose risks to the financial system
  • Today’s ADP Employment print is further evidence of a slowing recovery and near-term risks
  • Powell emphasizes termination of facilities does not mean Fed is stepping back from economic support

Lending Facilities Remained the Focus of Second Day of Powell/Mnuchin Testimonies

Yesterday’s Senate testimony saw Fed Chair Powell and Treasury Secretary Mnuchin pushing for further fiscal relief, facing pressure over the termination of certain CARES Act lending facilities, and discussing the near- and medium-term future of the US economy. Mnuchin noted a strong and continuing recovery while Powell’s message was more uncertain, noting vaccine distribution timelines and rising COVID cases.

Daily Increase in Positive Covid Cases

Created by Izaac Brook, Source: The Covid Tracking Project

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Today’s testimony to the House Financial Services Committee saw a repeat of these messages. Powell again noted that while vaccine news has been very positive for the medium term, the economy still faces severe challenges in the near term as the concerning rise in COVID cases continue. The continuing economic risks served as the motivation for lawmakers to continue to push Powell and Mnuchin on the termination of lending facilities.

The facilities set to expire on December 31st are the Corporate Credit Facilities, the Municipal Liquidity Facility, the Main Street Lending Program, and the Term Asset-Backed Loan Facility, mostly new facilities created under the CARES Act to provide further credit support to the real economy. Uptake from these facilities have been extremely limited compared to their overall capacity, but their announcement alone stabilized key financial markets. The Primary Dealer Credit Facility, Money Market Fund Liquidity Facility, Commercial Paper Funding Facility, and other Fed facilities created during the Financial Crisis to provide credit to the financial system will remain in place until March 31st, 2021. The remaining facilities provide the most direct backstop to financial markets.

Powell emphasized that the end of certain facilities did not suggest the Fed would be stepping back from supporting the economy. While taking questions from congressional members, Powell identified further labor market support through an extension of unemployment insurance and an increase in support for small businesses as the most valuable ways policy makers could provide further support to the economy. Other questions Powell faced included the topics of climate change risk, the transition away from LIBOR, and restrictions on the Municipal Liquidity facility. Powell noted the economic crisis would not be resolved until the pandemic’s effect on the post-pandemic economy are determined, likely in the second half of 2021.

Powell’s discussion of near-term risks and a slowing recovery were supported by this morning’s October ADP Employment Change report of only 307k compared to a forecast of 410k. Continued Jobless Claims continue to print higher than its Great Recession high. The USD has continued its downward trend since March’s high, hitting a another fresh two year low this morning.

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US Dollar Monthly Chart

USD Monthly Price Chart

Chart prepared by James Stanley; USD, DXY on Tradingview

--- Written by Izaac Brook, Research Intern for, edited by James Stanley

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