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Mnuchin-Powell split shows rare discord as US economy struggles – BNN

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The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy — a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus.

The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that “the full suite” of measures be maintained into 2021.

“This is a significant and disturbing breach at a critical time for the economy,” said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. “We need all the arms of government working together and instead we’re seeing a complete breakdown,” he said, noting that Washington remains at an impasse on fiscal stimulus as well.

Investor reaction to the split was swift amid fears the decision will unsettle markets and impede the economic recovery: futures on the S&P 500 Index were down 0.5 per cent in early Friday trading in Europe, with haven demand sending Treasuries higher and pulling down yields.

Treasury chiefs and Fed chairs typically coordinate closely at times of crisis, appearing jointly before Congress and working in lockstep to ensure funding markets run smoothly. The two agencies were tightly linked in the bailouts of the financial and auto industry more than a decade ago. And they united again in the March 2020 Cares Act economic rescue package, which appropriated cash for the government to finance Fed backstops for everything from municipal to corporate finance after markets buckled when the pandemic hit.

Now, Mnuchin wants some of the money back, arguing many markets are no longer at risk of seizing up and so don’t need further aid beyond next month. In his sights are facilities which sought to ease corporate credit and municipal-borrowing and also offered loans to small and medium-sized businesses. He asked that four other programs be kept in place for an additional 90 days.

“Financial conditions are quite strong,” Mnuchin said in an interview. “The good news is, the markets have recovered significantly,” he said. Companies don’t need more loans, and instead require more grant money, which requires action from Congress, he said.

The Fed has argued that the lack of take-up for some of the programs is a sign they’ve worked.

Mnuchin said that the purpose of his announcement was not to put the Treasury against the Fed, and that he was merely carrying out the law prescribed by the Cares Act. The facilities could be re-activated if needed with either congressional support or with other funds available to the Treasury, he said.

“It appears the Fed may be reading the legislation differently,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

The risk is that divisions between the key economic players undermines confidence at a time when growth is flagging. Fed Bank of Dallas President Robert Kaplan said on Bloomberg TV Thursday that there’s the potential for gross domestic product to shrink this quarter and even next.

The economy is also set to go without fiscal stimulus: Republicans and Democrats remain deadlocked on a new package, and measures including extended unemployment benefits are set to expire next month.

“I was a bit surprised” at the Treasury’s statement, Raphael Bostic, president of the Fed Bank of Atlanta, told Bloomberg TV. “Given where the economy is — and there’s so much uncertainty still out there — it’s prudent to keep those things open so that when people, if they do have stress, they can draw upon it.”

Among the initiatives that will now no longer be able to extend new credit are two Fed facilities that allowed it to buy corporate bonds for the first time. They helped to unfreeze that market, even before the effort was up and running, and businesses have since logged record amounts of debt issuance.

Another, the Main Street Lending Program, has had a slow start, and the Fed recently loosened its terms to help encourage banks and smaller businesses to participate.

Powell himself said at a virtual conference on Tuesday that the time to discontinue the lending facilities was “not soon,” highlighting that typically the central bank keeps its backstops in place for some time after a crisis hits. He has repeatedly praised the Cares Act for what he’s described as “essential” support amid the historic collapse in GDP in the spring.

The U.S. Chamber of Commerce called for a reconsideration of Mnuchin’s decision.

“We strongly urge these programs be extended for the foreseeable future and call on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer,” the chamber said in a statement.

The sun-setting of some of the facilities will now build expectations for the Fed to take some other policy action when it wraps its next meeting on Dec. 16, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.

“The market will now speculate the Fed may have to increase Treasury purchases and/or extend maturities” of the securities it buys through its main asset-purchase program, Emons wrote in a note.

President-elect Joe Biden’s administration could seek to renew the facilities, or press Congress to authorize fresh funding for them, when it takes office in January. Biden said Thursday that he’s made a decision on who he will nominate as Treasury secretary. Republicans in Congress have said the billions of dollars sent to the central bank can be deployed better elsewhere.

Biden’s Treasury could agree to restart the facilities, as Mnuchin pointed to, using the Exchange Stabilization Fund. But meantime, markets may need to contend with going “without a net” for several weeks, Feroli wrote in a note.

“For about three weeks in January the markets will be operating without the backstop they’ve had since the spring,” Feroli wrote.

–With assistance from Kathleen Hays.

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As economy struggles, Fed weighs boosting bond purchases – OrilliaMatters

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WASHINGTON — At their meeting earlier this month, Federal Reserve officials discussed possible future adjustments to the central bank’s monthly bond purchases to boost the economy.

The Fed on Wednesday released minutes of its Nov. 4-5 meeting revealing that while officials believed that no changes were needed to the bond purchase program at that time, “they recognized that circumstances could shift to warrant such adjustments.”

The Fed since June has been buying $120 billion in bonds each month to keep downward pressure on long-term interest rates as a way of giving the economy a boost as it struggles to emerge from a deep recession.

The purchases have included $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities.

With the economy showing signs of slowing in the face a resurgence in coronavirus cases and a return to shutdowns in some areas, there has been market speculation that the Fed could decide to boost the size of its monthly purchases.

The minutes show that while no decision was taken on what to do or when, Fed officials were keeping their options open. Some analysts believe the Fed will make an announcement on boosting the bond purchase program at its next meeting on Dec. 15-16, especially if there has been no movement by Congress to provide more economic relief to individuals and businesses.

The minutes said that many Fed officials “judged that asset purchases helped provide insurance against risks that might reemerge in financial markets in an environment of high uncertainty.”

Concern has been growing among economists that the economy is slowing after an initial rebound this summer and could even topple into a double-dip recession in the early part of 2021 if Congress does not replenish expiring support programs.

At the White House Wednesday, Peter Navarro, one of President Donald Trump’s economic advisers, told reporters that a “sober” reading of the economic recovery shows “we are facing … a chasm ahead for millions of Americans unless there can be a bipartisan” deal to provide further economic relief.

The minutes released Wednesday covered the Fed’s Nov. 4-5 meeting, held just after the November elections, and were released with the customary lag of three weeks.

At the meeting, the central bank kept its benchmark interest rate at a record low near zero and signalled that it was prepared to do more if needed to support the economy.

A multitrillion-dollar stimulus effort enacted in the spring has helped support millions of Americans who have been thrown out of work and provided further assistance to struggling individuals and businesses.

But many of those programs have expired and jobless benefits are due to run out for millions of Americans by the end of this year.

Federal Reserve Chairman Jerome Powell had said at a news conference following the two-day meeting that Fed officials had discussed whether and how a bond buying program might be altered to provide more economic support.

In addition to increasing the size of the program, the Fed could decide to alter the composition of the bonds purchases to focus on buying long-term securities as a way of putting added downward pressure on long-term rates.

___

AP White House reporter Kevin Freking contributed to this report.

Martin Crutsinger, The Associated Press

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UK borrowing to hit peacetime high as economy faces COVID-19 emergency – The Guardian

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By William Schomberg and David Milliken

LONDON (Reuters) – Britain will borrow almost 400 billion pounds this year to pay for the massive coronavirus hit to its economy, finance minister Rishi Sunak said on Wednesday, as he took his first steps to offset the country’s highest budget deficit outside wartime.

The world’s sixth-biggest economy is now set to shrink by 11.3% in 2020 – the most since “The Great Frost” of 1709 – before recovering by less than half of that in 2021, Sunak told parliament as he announced a one-year spending plan.

“Our health emergency is not yet over. And our economic emergency has only just begun,” he said, promising more money for health, infrastructure, defence and to fight unemployment.

Britain’s budget watchdog estimated borrowing would be 394 billion pounds ($526 billion) in the 2020/21 financial year that began in April, slightly more than it predicted in August.

At 19% of gross domestic product, the deficit will be almost double its level after the global financial crisis which took nearly a decade of unpopular spending squeezes to work down.

Sunak announced cuts to foreign aid spending and a freeze on pay for many public sector workers.

But with many public services still stretched, Sunak is expected to look more at tax rises to make up the shortfall.

“We have a responsibility, once the economy recovers, to return to a sustainable fiscal position,” he said on Wednesday.

Britain was hammered harder by the coronavirus pandemic than most other rich economies as it underwent a long lockdown.

Nearly 56,000 Britons have died from COVID-19, the highest death toll in Europe.

Even with recent positive news about vaccines, the Office for Budget Responsibility (OBR) said the economy was only likely to regain its pre-crisis size at the end of 2022 – or later if Britain fails to get a post-Brexit trade deal with the European Union before a transition arrangement expires on Dec. 31.

Sunak made no reference to Brexit in his speech.

YET MORE SPENDING

Since the pandemic struck Britain a few weeks after he took over as finance minister, the former Goldman Sachs analyst has rushed out emergency spending – much of it on pay subsidies to fend off a surge in unemployment – and tax cuts.

The shift away from the traditional economic orthodoxy of the Conservative Party has alarmed some lawmakers.

Sunak said the cost of his measures to fight the coronavirus was now 280 billion pounds for this year, up from a previous estimate of about 200 billion pounds.

Even so, long-term economic damage of roughly 3% of GDP was likely as a result of COVID-19, the OBR said.

Unemployment was likely to peak at 7.5%, from 4.8% now.

With that damage in mind, Sunak sought to stress how spending would rise in the short term as Britain grapples with the fallout from the pandemic.

Over this year and next, day-to-day spending will rise by 3.8% in inflation-adjusted terms, the fastest growth rate in 15 years.

To meet Prime Minister Boris Johnson’s promise of “levelling up” growth around the country, 100 billion pounds will be spent next year on longer-term investments, 27 billion pounds more than last year.

A new national infrastructure bank will be based in the north of England, where many voters broke with tradition and backed Johnson in last year’s election.

Johnson later told Conservative lawmakers at a meeting of the 1922 Committee that he was confident the British economy could bounce back quickly, and that his government would deliver for the people who elected him, a lawmaker attending the meeting said.

The OBR said it would take 1% of GDP of spending cuts or tax hikes to bring the government’s day-to-day spending into line with its revenues. Debt was likely to rise further, to over 109% of GDP in 2023/24, up from about 101% now.

Paul Johnson, head of the Institute for Fiscal Studies think-tank, said the headline numbers were “completely staggering” but hid a squeeze on spending in three or four years’ time which would be challenging to deliver.

Sunak signalled some early cost-saving moves, including the freeze on pay for public sector workers, except for doctors, nurses, other health staff and the lowest-paid public sector workers.

And Britain will save 3 billion pounds a year by cutting overseas aid spending to 0.5% of GDP, a level that remains higher than almost all other rich countries.

The Archbishop of Canterbury Justin Welby said the cut was “shameful and wrong”, former Prime Minister David Cameron said the government had broken a promise to the poorest countries of the world, and the government’s minister for sustainable development resigned.

(Writing by William Schomberg; Editing by Catherine Evans and Jan Harvey)

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UK borrowing to hit peacetime high as economy faces COVID-19 emergency – The Guardian

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By William Schomberg and David Milliken

LONDON (Reuters) – Britain will borrow almost 400 billion pounds this year to pay for the massive coronavirus hit to its economy, finance minister Rishi Sunak said on Wednesday, as he took his first steps to offset the country’s highest budget deficit outside wartime.

The world’s sixth-biggest economy is now set to shrink by 11.3% in 2020 – the most since “The Great Frost” of 1709 – before recovering by less than half of that in 2021, Sunak told parliament as he announced a one-year spending plan.

“Our health emergency is not yet over. And our economic emergency has only just begun,” he said, promising more money for health, infrastructure, defence and to fight unemployment.

Britain’s budget watchdog estimated borrowing would be 394 billion pounds ($526 billion) in the 2020/21 financial year that began in April, slightly more than it predicted in August.

At 19% of gross domestic product, the deficit will be almost double its level after the global financial crisis which took nearly a decade of unpopular spending squeezes to work down.

Sunak announced cuts to foreign aid spending and a freeze on pay for many public sector workers.

But with many public services still stretched, Sunak is expected to look more at tax rises to make up the shortfall.

“We have a responsibility, once the economy recovers, to return to a sustainable fiscal position,” he said on Wednesday.

Britain was hammered harder by the coronavirus pandemic than most other rich economies as it underwent a long lockdown.

Nearly 56,000 Britons have died from COVID-19, the highest death toll in Europe.

Even with recent positive news about vaccines, the Office for Budget Responsibility (OBR) said the economy was only likely to regain its pre-crisis size at the end of 2022 – or later if Britain fails to get a post-Brexit trade deal with the European Union before a transition arrangement expires on Dec. 31.

Sunak made no reference to Brexit in his speech.

YET MORE SPENDING

Since the pandemic struck Britain a few weeks after he took over as finance minister, the former Goldman Sachs analyst has rushed out emergency spending – much of it on pay subsidies to fend off a surge in unemployment – and tax cuts.

The shift away from the traditional economic orthodoxy of the Conservative Party has alarmed some lawmakers.

Sunak said the cost of his measures to fight the coronavirus was now 280 billion pounds for this year, up from a previous estimate of about 200 billion pounds.

Even so, long-term economic damage of roughly 3% of GDP was likely as a result of COVID-19, the OBR said.

Unemployment was likely to peak at 7.5%, from 4.8% now.

With that damage in mind, Sunak sought to stress how spending would rise in the short term as Britain grapples with the fallout from the pandemic.

Over this year and next, day-to-day spending will rise by 3.8% in inflation-adjusted terms, the fastest growth rate in 15 years.

To meet Prime Minister Boris Johnson’s promise of “levelling up” growth around the country, 100 billion pounds will be spent next year on longer-term investments, 27 billion pounds more than last year.

A new national infrastructure bank will be based in the north of England, where many voters broke with tradition and backed Johnson in last year’s election.

Johnson later told Conservative lawmakers at a meeting of the 1922 Committee that he was confident the British economy could bounce back quickly, and that his government would deliver for the people who elected him, a lawmaker attending the meeting said.

The OBR said it would take 1% of GDP of spending cuts or tax hikes to bring the government’s day-to-day spending into line with its revenues. Debt was likely to rise further, to over 109% of GDP in 2023/24, up from about 101% now.

Paul Johnson, head of the Institute for Fiscal Studies think-tank, said the headline numbers were “completely staggering” but hid a squeeze on spending in three or four years’ time which would be challenging to deliver.

Sunak signalled some early cost-saving moves, including the freeze on pay for public sector workers, except for doctors, nurses, other health staff and the lowest-paid public sector workers.

And Britain will save 3 billion pounds a year by cutting overseas aid spending to 0.5% of GDP, a level that remains higher than almost all other rich countries.

The Archbishop of Canterbury Justin Welby said the cut was “shameful and wrong”, former Prime Minister David Cameron said the government had broken a promise to the poorest countries of the world, and the government’s minister for sustainable development resigned.

(Writing by William Schomberg; Editing by Catherine Evans and Jan Harvey)

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