Republicans are bashing the new $1.9 trillion pandemic relief package for further ballooning the federal debt, but it’s the Trump administration that greased the path for a smooth federal spending spree.
The Treasury has a cash pile of well over $1 trillion, which will allow the government to quickly disburse money in line with the sweeping new law, including direct checks to millions of Americans that are expected to start hitting bank accounts in the coming week. That robust rainy-day fund was built last year by then-Treasury Secretary Steven Mnuchin, who preemptively cranked up the pace of government borrowing, unsure of how and when Congress might mandate further relief measures.
So, despite concerns that markets will be flooded with new U.S. government debt to pay for the rescue package, the Treasury Department might not have to change its borrowing plans much at all to fund the legislation signed into law by President Joe Biden on Thursday.
“There are enormous implications for everyone else, but the Treasury was out in front of this nine months ago,” said Lou Crandall, chief economist at research firm Wrightson ICAP.
The advance moves by the Trump team are proving to be key to limiting turbulence in government debt markets from such massive spending. Bond yields have already been inching up in recent months due to brighter prospects for the economy, raising the cost of new borrowing — a dynamic that’s rippling through markets and is expected to be a central focus as Federal Reserve policy makers meet in the coming week.
The planning by Mnuchin also demonstrates that, even as Republicans now balk at the price tag of Biden’s rescue package, the Trump administration itself was prepared for the possibility that the economy would need another big infusion of cash to fully emerge from the pandemic.
“Early on in the Covid crisis, I made sure we always had ample funds on hand to be prepared for any needed economic response,” Mnuchin said in an email.
Treasury always has to have enough cash on hand to fund immediate government spending obligations, which it keeps as deposits at the Federal Reserve. But those funds more than quadrupled in 2020. When Biden took office, Treasury’s deposits at the Fed stood at about $1.6 trillion, compared to $400 billion in 2019, and Treasury is expected to burn through about $1 trillion of that already-borrowed cash to help fund the relief package.
“That is $1 trillion of money that the Treasury does not have to borrow this year,” said Seth Carpenter, chief U.S. economist at UBS who served as a top debt-management official at Treasury under President Barack Obama.
Plans by Treasury Secretary Janet Yellen to dip into the government’s deposits at the Fed, coupled with the central bank’s own efforts to boost the economy through sizable purchases of U.S. federal debt, “have helped beat back fear and volatility,” said Julia Coronado, president of MacroPolicy Perspectives.
That doesn’t rule out the chances that rates could begin to rise when additional debt actually arrives on the menu. “It’s one thing to see the buffet table,” Crandall said. “It’s another one to eat it all.”
On the other hand, Treasury’s move to start spending its cash also means it has been cutting back on short-term instruments, used for quickly raising funds, leaving bond investors eager for more government debt with a maturity of less than a year.
So the new law will also likely lead Treasury to cut back less on issuing those highly in-demand instruments. “It’s striking that we’re preparing for this and doing so while actually reducing [short-term debt] issuance,” Crandall said.