It also fueled speculation by some commentators that the Trump administration was attempting to constrain President-elect Joe Biden's ability to respond to the economic fallout from the pandemic as Covid-19 cases surge in the U.S.
US Secretary of the Treasury Steven Mnuchin and Federal Reserve Chairman Jerome Powell testify during a Senate Committee on Banking, Housing and Urban Affairs hearing examining the quarterly CARES Act in Washington on September 24. "It's very clear in the law". Congress allocated $454 billion to the Treasury to backstop Fed lending and calm turbulent markets as the pandemic struck. "The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy", the bank said.
Mnuchin's decision received support from Sen. "You know, all of the things being equal, the Fed always likes to keep their tools outstanding", he said. Mnuchin wants some of the money back, arguing that many markets are no longer at risk of seizing up and so don't need further aid beyond next month. Policy makers have acknowledged that is partly because early iterations of the tools were too narrow and created to limit credit risk.
But investors also are moving beyond the safety of big tech stocks to small cap and even emerging markets as they anticipate improving economies next year, Bahnsen said.
"We don't need to buy more corporate bonds", Mr. Mnuchin said. "We need this money to go help small businesses that are still closed". "Or people who are going to be on unemployment, and unemployment is running out". Republicans and Democrats have been deadlocked for months on approval of another round of coronavirus support measures.
The secretary on Thursday sent Powell a letter demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress.
"It appears the Fed may be reading the legislation differently", given its statement on Thursday evening, said Mr Michael Feroli, chief United States economist at JPMorgan Chase & Co.
The Treasury secretary spoke with White House chief of staff Mark Meadows and Senate Majority Leader Mitch McConnell (R., Ky.) on Friday.
Mnuchin told CNBC's Jim Cramer on Friday that people were misunderstanding this decision, adding there is still plenty of money to provide funding if needed.
Some officials, including a Democrat sitting on the commission supervising spending under the Cares Act, have said the Fed wasn't legally required to return funds already transferred to it by the Treasury.
"Congress should repurpose this money toward the kinds of urgent, important, and targeted relief measures" Republicans have been advocating, McConnell said, without mentioning any of the initiatives Democrats have been seeking in new legislation.
However, critics saw politics at play in Mnuchin's decision, saying the action would deprive the incoming administration of critical support the Fed might need to prop up the economy as coronavirus infections spike nationwide. They helped quell the panic, but take-up has been relatively low - which the Fed says is a sign that they have worked.
This article is republished here with permission from The Associated Press.
McConnell has repeatedly said the starting point for talks should be the $500 billion measure backed by Senate Republicans, which would not provide direct $1,200 stimulus payments to individuals or aid to state and local governments.
On Thursday, aides to Pelosi, McConnell, Schumer and House Minority Leader Kevin McCarthy met to discuss a separate $1.4 trillion funding bill that's needed to keep the federal government open after December 11.