Mnuchin: Following Law In Seeking Return of Fed Funds

in studio Michael McKee, International Economics and Policy correspondent. If you hadn't guest, of course, you want to talk about the little back and forth let's call it between the Treasury and the Federal Reserve. So see, yeah, let's get the skinny from you. First, Treasures Actory Steve Manuten asked for funds back unused funds. Was it really necessary to ask for them back? Would they have just sort of reverted at some point? I mean, that's an absolutely fair

point to make. The Secretary said that he was merely following the law that the Cares Act as it was written. He was in the room when it was in cobbled together that it did play that that those funds need to be returned to Congress. UM, you could make a case to say that he should not have done anything

and just let that money revert back. But at the same time, I've heard from some UM experts that the Tradure Department seeks not to make any market sensitive announcements in December or too late in the year, or any kind of big moves because of the lack of liquidity and markets, and so I think they were also fear that not saying anything or letting this sort of surface on its own late in December would have shaken up

markets more than it needed to. Mike, what do you what's just summarized for us the response from the FED and what you think the FED will do going forward. Well, the FED basically said, we don't want to give up the money, we don't want to end these programs. And what was unusual is not that they feel that way, but that they so expressly said it so quickly after

Secretary of Minution released his letter to them. Uh. The FED is obviously a government bureaucracy on the one hand, and blowth to give up powers, but also their feeling is the Secretary got it backwards that the Secretary was saying, we don't need these anymore because we've brought down spreads because the loans have kept the markets open, and the feed is saying yes, but it's the fact that they exist that's keeping the markets open, and so you have

run a risk if something goes wrong that the market sees up again the capacity for intervention of the confidence as well, that engenders Michael um, what will the Federal Reserve do? I mean, is this a political motivation on the part of Treasure Secretary Minution? I mean, he won't be Treasure secretary next year. There's a lot of speculation about what the point of it was, and there doesn't seem to have been a real strong point to do

it yesterday. Whether he's carrying out the president's wish to sand bag the Biden administration or not, we don't know. The FED will probably go along. Uh. They do have the ability to tap the Exchange Stabilization Fund. All this money that Congress appropriated went into the e s F, and they've pulled the money out of there and then give them If the money is repurposed, then they'll still be about seventy four billion dollars that they could use,

which is more than they've spent. I mean, they only spent about billions, so they probably have enough money to deal with things. What they wouldn't be able to do is start up a whole new round of programs should the economy go pear shaped in the first quarter or something like that. The other question is what would Treasury do with the money? And remember we're not talking about the four billion, because they've spent about a hundred billion of it, so we're maybe talking two hundred and sixty

billion or so that would go back. Congress has to officially appropriate that. And so the other suspicion is that what Manucha was doing was trying to jump start negotiations with the rational Democrats by saying, you know, we can all agree, here's a pot of money that's not being used.

Let's just get it out to some money. Well, so, Celia, based upon your exclusive interview with Treasury Secretary Stephen the Nuchin, do you think that he and the Treasury are prepared to move forward on this and act on this or was this more posturing? Do you think I don't think this was posturing. He was very clear in the letter and in the press release. In his comments to me, that he is following the law, he is doing what

was expected to be done. He pointed out that when the half trillion dollars was put into the e FF, Democrats were saying that this is Stephen the Nation Flush Fund, and now they're criticizing him for returning that money as the law says. The other point to be made is that, as Mike points out, is that the e FF has another roughly seventy five billion dollars that it has nothing to do with Congress, and that money can be very quickly activated but the Treasury and Fed Department if the

markets do need it. Um. But the other thing is, you know, he Schary Secretary Monution has never fully understood how to works of Congress. So I have to at least put it out there in wonder if he had made this announcement but also had been able to say that he had already spoken to Mitch McConnell, Kevin McCarthy, maybe even Nancy Pelosi's that I've got this money was and we are going to try to put this into

the economy. You couldn't get anything else, and maybe it would have had a different reaction to it right, and also just the very fact that if the FED didn't know this was coming and so unusual, I mean, wouldn't you have thought that there would be a heads up given that there was going to be some kind of announcement that might impact markets. Mike, Well, I think the FED knew it was coming, because they reacted so quickly, and they don't put out statements that fast unless they

already knew what was going to happen. So I presume that the Treasury Secretary and the Fed German had spoken about this, and Manugent had given Paul the bad news, and so the FED was prepared, certainly to get in the Treasury's face like that. They would have had to have a discussion about whether there's a good idea and why do we want to do it and stuff like that. Silely, do we have any sense of timing this may roll out?

I don't recall this happening in the past. I'm just not sure how this is going to going to go in terms of timing. Well, I mean, the programs, by law, they spend it onto some thirty one, though sometime by then you know that money has to be returned to Congress and taken out of treasuries, not only the Exchange Stabilization Fund. But it cannot just rest in Treasury General Service account. It has to be given back to compers.

I'm thinking sometime by the end of the year, and we should really ask why so little of it was used, Mike, I mean, yes, there's other benefits to having money in a part lying there, but actually use of this Why why did not more get used? Well, there's two aspects

to what they were doing. One was opening the markets, and by cutting rates to zero and opening the primary and secondary credit facilities, just that act alone reassured markets that there was a lender of last resort at work, and so spreads came down without them spending a lot of money. They did by in the secondary market, but

they never bought in the primary market. And then the other was the lending programs, particularly main Street in the municipal facilities, and they the main Street facility took so long to set up that it didn't have a lot of utility, in part because the companies that could get loans got loans and those who couldn't. The banks didn't want to make loans to anyway because they felt they

couldn't handle the debt. Municipal facility has a penalty rate on it in a fee, and so the when the FED acted, spreads came down in the muni market and it was cheaper just to directly borrow than to go through the FED. So that's why they didn't use a lot of the money. But again the FED are used. If we hadn't had the money in the first place, then the spreads, et cetera wouldn't have come down. Fascinating.

Selia Molson, thank you so much for joining us. Siliamilson, u S Treasury reporter, fascinating story she has for Bloomberg News, and of course Michael McKee, international Economics and Policy correspondent joining us as well for this fascinating story that was certainly the news of the warning hasn't really moved markets all that much. We'll remember, back in the early days of the pandemic, we're talking V shape or U shape or maybe an L shaped. Then K shaped came into

the discussion as well. Well. Here we are eight months, nine months into this, let's see where we are with the economy and the rebound. We can do that with Lindsay Piegza, Chief economists for Stiple Financial lindsay, thanks so much for joining us here. As we stand here, you know in late November, eight months into this pandemic, we've seen what the Fed can do, We've seen the stimulus.

What's your outlook for the next six to twelve months here as we try to gauge the shape of our rebound here, Well, I do think it's important to know that the U s economy rebounded at a record case in the third quarter, more than offsetting the decline that we saw on the second quarter, at least from percentage terms. But going forward, it does appear that the US economy is already beginning to lose momentum, particularly on the consumer front.

Retail sales up just a couple of tents of a percentage point, the latest report coming in about half of expectation and also representing a multi month low. So we do have some concerns about this waning momentum, not to mention the rising risk of a second round resurgence of the virus and subsequent policies put in place then to

help stem the spread of the virus. UH continuing to support elevated joblessness, business closures, really undermining or potentially undermining the improvement that we have seen in the third quarter. So we do expect growth to slow markedly going into the end of the year, and as we turned the corner into the new year, potentially, depending on the depth and duration of this second round resurgence resurgence, we could see growth fall back into negative territory, sparking a second

round recession. So right now, the risk to the economy are certainly to the downside. Yeah, I mean that would be very very, very difficult to pull ourselves out of. And Z at that point, would it be just necessary for Congress to you know, I mean, what would we even talking helicopter money at that point? Well, I don't know if necessarily we need helicopter money, but but we certainly do need some sort of artificial support. Remember that

this isn't a market crisis. This is a health crisis, and we're talking about millions of individuals losing their jobs, losing their businesses, income revenue opportunities through no faults of

their own, but rather through the government's direct design. And so right now that this is not a normal scenario by any means, we do in fact needs some continued artificial support that being said, we want to make sure that any additional aid or relief that comes down the pipeline is used smartly and reaches those individuals or small businesses that it is intended for. So, what is in your base case, Lindsay's as you think about the remainder

this year and more importantly going into next year. Is there some fiscal stimus. If so, what kind of eyes and what kind of timing are you thinking about. So we are factoring in a fifth round stimulus package, but we're looking for something more muted around one trillion dollars.

And it's amazing that we're talking about a muted level of expenditures around one trillion, But I mean that in compared to the initial proposal from Democrats looking for two plus trillion, and of course relative to what goop senators, we're looking for less than a trillion, much more a much a much smaller, much more targeted package. So we do think it will be somewhere as struck in the middle around that trillion dollar mark. The timeline for that

is likely to be in the first quarter. Right now, it does seem that officials on both sides, both Republicans and Democrats, are more concerned about really uh marking a political victory or at least as not acquiescing to the demands of the other side, So really playing politics as opposed to getting down into negotiations trying to reach some sort of middle ground in order to get this much

needed aid to individuals and businesses. Is that what's going on with the Treasury secretary as well, that it's more politics that he's asking the FED to return unused funds. Well, I don't know, and necessarily if it's politics or if it's a different way of viewing these programs, remember they were always intended to be temporary, and he's not terminating them early. He's simply saying that he'll allow them to run out at their scheduled time at the end of

the year. That being said, you could certainly reagnitiate those, reignite those at that started the year, or leave it to the Biden administration once they are presumably sworn in in late January, to reignite those lending programs. In the meantime, the FED is not being left without additional tools. The Federal Reserve certainly could implement additional forward guidance, yield curve targeting, ramp up asset purchases, so they still have a number

of tools in their tool belts. But to the Fed's point, we have heard from a number of officials that they would rather have all of the possibilities still on the tape. Will given that the economy is in such a fragile position, and given that we are facing a second round resurgence and potential second round lockdown as we look out to the end of the year. Hey, lindsay, just real quickly twenty seconds, what's your view of the labor market given that we may be going into some more lockdowns. I

think the labor market is increasingly fragile. We have seen massive job layoffs, and while we have recaptured about half of the job's loss at the start of the year, if we see more and more business closes, closures, that will result in further layoffs, temporary layoffs, you name it, further wage losses, which will only compound the difficulties that we've seen in the consumer sector. And lindsay, just one last thing, your run rate for GDP through the end

of the year. An incident next year, I think the US GDP is going to struggle to maintain a sustainable level nearer that two percent that we saw heading into with very low single digit growth, if not falling back into negative territory, if in fact we do see a second round locksown even as I can down light lockdown scenario, Lindsay, thank you so much for that. M. Lindsay, Vaga's managing director in chief economists at Stevel. Nikolas there with I guess some good news and some bad news. I mean,

it really is a kind of a mixture. It's a tough situation to have to read, and I don't envy the job of those who have to put all this into models. Well, one financial term that has come into my vocabulary at least during this pandemic has been corporate zombie. And apparently corporate zombie is a company that it's not even earning enough to cover their interest expense. And there's some notable names that are quote unquote corporate zombies. Boeing, Carnival,

Delta Airlines, even Exxon Mobile. Let's get a little bit smarter about this issue, and we could do that with Brian Schapada, debt markets columnist for Bloomberg Opinion. Brian, thanks so much for joining us here. Corporate zombies. So this is really a thing. It is, Um there's one point for a trillion of that you used to mention the criteria that my Bloomberg News colleagues were looking at earlier this week, which is trailing twelve month operating income versus

interest expenses. So the idea basically is that if you don't even make enough to cover your obligations, they're not really in a position to hire more people. You're not really in a position to invest in more opportunities to grow. So these are companies that are kind of hobbling along and getting by through ultra cheap borrowing costs. So there's a risk there that they'll hamstring the economic recovery here

out of the coronavirus pandemic. Yeah, what is the thinking of these companies that they'll just keep going as long as they can and the you know, this is a good offer. Well, one of the things that that that we really try to look at me in my Bloomberg Opinion colleagues was there's a variety of companies that are in here, right, So you talk about things like Axon Mobile, ge Boeing. I mean those are pretty big companies, right, And I mean they're kind of value place at at heart.

You also have growth companies that are you see companies like Beyond Meat, Spotify, Uber, even Maderna are technically corporate zombies under this criteria. UM, but they have a reason for that, right They're not necessarily focused on profitability right now. They're trying to grow UM. So it's a bit of a mixed bag. But there are certainly some industries where you kind of look at it and you think that

the the outlook, isn't it pretty bleak? So Brian, early in my career, I was a corporate finance banker where I made loans to media companies. In my job as a low man on the totem pole, the team was to build a spreadsheet and to make sure there is enough cash flow to support the interest uh and even the debt service principle. And if the special little cell came up red I either wasn't enough cash flow to support the interest, we didn't make the loan. How are

these guys coming back to the market. What are creditors thinking? Well, I mean the credit markets are wide open right now, so I think that there's not a lot of there's not a lot of concern there's this feeling that for certain companies, especially that the federal government will step in if necessary, that they're too systematically important, thinking more of

Boeing in that in that instance. But you also really have other companies like the movie theater chains for example, My bombing colleague Tara la chappelle um wrote about them, and they really made kind of a blunder in the past few years, kind of really you know, expanding these movie theater facilities, making all these acquisitions is taking out a lot of debt, and now there's a real question about their going concerned uh status in a way, because who wants to go back to a movie theater right

now when especially there's all these streaming services that are competing. So there are certain industries that are really coming under pressure. But for now, I think there's a feeling that investors just are piling into corporate credit. Um we'll see if that changes at all with the shutdown of the Fetes facility, but it's been wide open for a long time, and of course that's what all the serious debt guys are

waiting for right there. Some of them are already invested in some of these companies that we're finding a difficult to get loans, but others are waiting for them to be even in more trouble, at which point they'll help them through some kind of a bankruptcy process and we'll still see companies return, but they'll just be leaner and miner. Right. Yeah, that's a great point. I mean, you think about the distress of debt investors out there, Howard Marks and and

and his ILK. I mean, they're all they've raised a lot of money for distress credit funds and they're kind of waiting for the next shoot drop here. So to the extent that some of these companies do come under even further pressure and may be locked out of the more traditional credit markets. I do think that there's a lot of money out there waiting for uh, for liquidation as type yields, you know, ten percent or higher, hing being able to turn things around and and and lock

in a really nice profit there. Well, you know it's interesting when I was an equity analysts, say, all we had to do was just tell a nice rosy story about a year or two them the road, and that's all you needed to do to sell stock. Whereas these credit analysts, uh, that's these are tough folks, they look at the numbers, and if the numbers aren't there, you know, they really put this wait a second, go back and

say that again. All you have to do is tell a rosy story that was absolutely absolutely and I always you know it's gonna be great two years down the road, Biden stock now. But in the interim, for the credit folks, they gotta make interest payments and principal payments and things like that. So are you getting a sense, Brian, that the standards within the credit markets are are you know, getting dangerously lax? I mean, I think I think that

that's been kind of the assumption for a while. Um, with the FED being kind of in the in the markets, there was this expectation that things wouldn't quite get so bad. Um. You sort of look at share prices to your point about equity. Um, you take a little bit share prices on some of these companies and they've rebounded quite dramatically, and there will be some that survived. I mean, my

my colleagues there. How Zach wrote about Darden restaurants and Olive Garden, and there's a feeling that there will be a return to dining out once uh, once people feel comfortable, and there's a vaccine. That's not something that's going away anytime soon. But retailers may season gap, they might have a bit more struggle. And it's kind of just this question of whether COVID has exacerbated friends that had been

happening for a long time. You talk about the retail apocalypse that's been a thing for a long time and people's vocabulary versus something that was more of just a shock to the system. Thinking about restaurants and dining out, there is a huge trend towards doing more of that that's suddenly reversed this year, Brian, just briefly, because we're

you know, only about a minute left. This returning money to the treasury or returning unused funds to the treasury, and you explain it to the labors and are there actual funds sitting somewhere that need to be you know, carded off from one place back to the treasury. Kind of Um, you can think about it that way. I yet that there's just funds that are fear marked that can't be re earmarked. I mean, it's kind of just it's kind of a mess. But basically, the Fed has

money that it had appropriated to it. The Treasury wants that money back so that Congress can reappropriate it to something else. Congress could also just raise more money and appropriate it elsewhere and not touch the Fed's money, but they're choosing not to for whatever reason. So I think

we'll have to watch and see what happens. But Steven Newton seems to be doing some political maneuvering, I think, and everyone's just kind of wondering if the FED will actually honor its request or if it's going to be any more pushback, right, I mean, yeah, I'd love to have a long conversation about this because it goes to all the all the inner workings of the monetary system and and and how Congress can I guess, you know, help the FED fulfill its mandations in some ways. Brian,

thank you. That is Brian Shapata, and he is a Bloomberg Opinion Dead columnists read a story today, but also follow him all the time because he knows what's up. Well, you know, when Larry Ellison's little Hawaiian island Lanai is hit by coronavirus that it is really serious. It had been coronavirus free for the whole spring and summer and now it's three thousand residents are plunged into the virus outbreak and tourism. Hold all that to say, we are

not even coming out of the woods. We're still right in the center of the woods. And let's talk to Lauren Soura now John Tompkins University, Associate Professor of Emergency Medicine, to tell us more. Lauren, you know, is there any place in the United States where it's not exponentially rising now,

not from what I can see, you know. And we we've had a total of over two hundred fifty thousand desks to start this pandemic, and um that number just keeps growing, approaching almost two hundred, sorry, almost two thousand yesterday. I think as we look at many of the maps that are trying to um estivate risk across the country, they're all, you know, screaming red. They're all they're all

showing risk. They're all showing widespread community transmission. And it's something that, um, I think we really need all eyes on right now. Lauren, this feels worse than maybe I was expecting. As you talk to your colleagues in the medical community, does it feel worse than expected? To them as well. I think it feels worse for a couple of reasons. I think the key reason is it feels

worse because it kind of feels like no one's listening. Right, So we have the experience from the summer and spring, and we feel we did, feel like we've learned a lot of lessons UM. And then you know, you go out into the community and you see people not wearing masks.

You here on social media and on the news UM protests around masking and social distancing and other UM measures that are protective of the public's health, and UM just generally speaking, I think that the part of the reason it feels worse is because it feels like, um, it was preventable, yeah, and or at least, you know, controllable

in some way. Lauren, there was some Bernstein research that was looking at the various states and how many people would have to be in a restaurant for there to be a fifty percent chance of you you know, coming across one person with coronavirus. And I wondered how you look at statistics like that, because there were complaints that you know, that's not a true measure of how much coronavirus is out there that you're you're talking there about

only asymptomatic people that appear in a restaurant. Anyone who's symptomatic is likely to not be going indoor dining for example. Yeah, I mean, I think restaurants are very risky right now. UM, And I think part of that is because we don't fully understand the picture of asymptomatic infection and um, partly because the environment just creates opportunities for exposure that may not be in other situations. Right. You used to take

your mask off to eat and drink. Um, you have to be handed materials from another person, So that plate or that drink or um, your silverware and so and and then on top of it, as the weather gets colder, more people are moving inside, you're sitting closer together. Um, you know, having that mask off with the long periods

of time, as people are moving about the restaurants. Um, it is hard to take general numbers that that are estimated across the community or across the region and apply them to the to the experience that happens within a restaurant that very unique environment. So, Lauren, I mean Johns Hopkins is obviously one of the finest medical centers and

scientific centers in the world. If I were to go into the emergency room today, if Johns Hopkins in Baltimore, what would I find in terms of how many patients, how crowded, how crazy is it they're the morale of the people in the emergency room, What would I find? Yeah, I think what you would find first and foremost is UM is a lot of people. UM. You know, all those people who would have had emergencies if it weren't for the COVID pandemic are still having those emergencies, right,

So they're still in our emergency department. They still you know, critical, they need critical care. UM, they need emergency observation or treatment from our physicians and our nurses. UM. And so they're all still there. You would also see a lot of people with undifferentiated respiratory infections and respiratory symptoms, and they're in the process of being determined whether they have COVID or they have flu, or they have some other

respiratory infection. UM. You'd see a lot of people in our waiting room, and you'd see a lot of exhausted physicians and nurses trying to move these patients through as safely and quickly as possible. The volumes across the country are are high. They're they're higher than we want them to be, and they're higher than UM then they should be to create a safe environment to provide optimal care. Do we have enough PPE? I think PPE feels a

little better. It's one of the pieces that we're less worried about than UM than you know, healthcare workers for example, I think as we move into flu season there are risks of having those PPE gaps. Again, a lot of work was done to create PPE stockpiles and stores across the country, and so I feel a little more confident in the PPE supply chain. That being said, you know there there are going to be gaps and UM, there's gonna be dramatic need for PPE as we moved through

the winter. Lauren Sour, thank you so much once again for joining us. We always appreciate you taking the time. Laurence Sour, Associate Professor of Emergency Medicine at Johns Hopkins School of Medicine. We should know that the Bloomberg School of Public Health is supported by Michael R. Bloomberg, founder of Bloomberg LP, and Bloomberg from the MTPS and this radio station, and Vonnie, I just you know, your hearts

goes out to these healthcare workers. They've been working for so many months under such incredible stress, and here we with for many of them, the third wave. Hopefully they can do well. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm

on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio