America's monetary punchbowl is as full as ever

There has been a rare public spat between the US Treasury and the Federal Reserve, America's central bank. At the end of last week outgoing treasury secretary, Steven Mnuchin, ended a raft of Fed-run emergency lending programmes established in response to Covid-19. 

The programmes, which include support for corporate bond markets as well as a provision to lend to smaller businesses, have not been widely used but played a major role in restoring confidence to global credit markets after their meltdown this spring. Mnuchin says that the policies have “clearly achieved their objectives” – bond markets are far calmer now – and should end on 31 December. Although it complied with Mnuchin’s request, the Fed said it would “prefer the full suite of emergency facilities… to serve their important role as a backstop for our still-strained and vulnerable economy”. The imminent arrival of new management at the US Treasury meant markets reacted calmly to the spat. This week Joe Biden picked former Fed chair Janet Yellen to be his new treasury secretary. With Jerome Powell continuing at the Fed, that makes for an “exceptionally dovish combination”, says Stephen Innes of Axi. Powell and Yellen have similar views so next year is likely to bring harmony on the policy front. 

The end of the support programmes is unlikely to have much effect on the real economy, Andrew Hunter of Capital Economics tells Liz McCormick on Bloomberg. Yet deprived of these tools, the Fed will now be more inclined to boost its quantitative easing (QE, or money printing) programme in order to stimulate the economy. Not that it needs more stimulus: corporations can already load up on mountains of cheap debt courtesy of central banks; junk bond yields have fallen to a mere 4.6%. The monetary punchbowl is as full as ever.