The Federal Reserve says it will return the unused money allocated to it by the Treasury to set up its emergency support programs during the COVID-19 crisis.

On Friday, Fed Chairman Jay Powell said he “will work out arrangements... for returning the unused portions of the funds” appropriated to the central bank and the Treasury in March by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The announcement comes a day after U.S. Treasury Secretary Steven Mnuchin ordered the Fed to allow nine of its 13 liquidity facilities to close on December 31. Those closures would end backstops to corporate bond markets (Primary, Secondary Market Corporate Credit Facilities), small- and medium-sized businesses (Main Street Lending Program), and state and local government bond issuers (Municipal Liquidity Facility).

The Fed responded with an unusually barbed response Thursday, protesting that the central bank “prefer that the full suite of emergency facilities...continue to serve their important role.” Powell’s letter on Friday softened in tone and acknowledged the Treasury Secretary’s “sole authority to make certain investments” in the Fed facilities.

For its part, the Treasury argued that the programs’ low uptake warrant a return of $429 billion in unused money.

The fallout between the Fed and the Treasury raised a number of questions, first about what will happen to the various liquidity facilities, but secondly about the political consequences of not having the backstops.

What’s closing down on December 31?

Since the beginning of the pandemic, the Fed opened up 13 liquidity facilities (details on each facility are detailed here), 12 of which were set up to expire on December 31. The Treasury letter from Thursday orders the Fed to allow nine of them to close:

-Primary Market Corporate Credit Facility (PMCCF)

-Secondary Market Corporate Credit Facility (SMCCF)

-Term Asset-Backed Lending Facility (TALF)

-Main Street New Loan Facility (MSNLF)

-Main Street Priority Loan Facility (MSPLF)

-Main Street Expanded Loan Facility (MSELF)

-Nonprofit Organization New Loan Facility (NONLF)

-Nonprofit Organization Expanded Loan Facility (NOELF)

-Municipal Liquidity Facility (MLF)

Mnuchin authorized a 90-day extension for the four remaining facilities:

-Commercial Paper Funding Facility (CPFF)

-Primary Dealer Credit Facility (PDCF)

-Money Market Mutual Fund Liquidity Facility (MMLF)

-Paycheck Protection Program Liquidity Facility (PPPLF)

How much will the Fed have to return?

The CARES Act appropriated $454 billion to the Fed and the Treasury to set up these facilities. The Fed has used only $25 billion of that money through its emergency facilities.

Mnuchin’s letter asks the Fed to return the remainder: $429 billion. Powell’s letter on Friday did not clarify exactly how much it will return.

Both Mnuchin and Powell insist that the Fed and Treasury could re-open some of those facilities with money from the Treasury’s Exchange Stabilization Fund (ESF). Mnuchin told CNBC Friday that combined with the Fed’s existing loans, the ESF could support over $750 billion in loans to the economy (compared to $2 trillion of potential capacity using the CARES Act funds).

What does this all mean for the markets?

Markets traded down slightly on Friday as investors digested the news, with the Dow having fallen over 200 points at the closing bell.

Markets directly backstopped by the Fed’s facilities did not appear disrupted by the news. Bloomberg reported Friday that Carnival Corp. was able to drum up $11 billion in orders for corporate bonds despite the news that the Fed’s corporate credit facility would not be operating past December 31.

Still, some worry that with rising COVID-19 cases, the lack of fiscal support and now, Fed support to financial markets, may create trouble.

Evercore ISI wrote in a note November 19 that “US credit markets will have to get through the winter months in which the surging new wave of the virus and exhaustion of savings from prior fiscal stimulus threaten a loss of economic momentum.”

Does this increase the onus on Congress to pass fiscal stimulus?

Mnuchin argued in his letter that returning the unused money will allow the government to redirect funds toward a new Paycheck Protection Program “that won’t cost taxpayers any more money.”

But Isaac Boltansky, analyst at Compass Point, wrote Friday that the Fed and Treasury development doesn’t change the fact that the White House and Congress have not appeared close to a stimulus deal for weeks.

“There is no sign whatsoever that Congress is close to a stimulus deal and [Mnuchin’s] ‘hope’ for a legislative agreement is distinct from the decision to sunset existing Fed facilities,” Boltansky said.

On the claim of redirecting money at no cost to taxpayers, the nonpartisan Congressional Budget Office did not attribute any deficit to the Fed and Treasury funds because the lent money would have to be paid back at some point. That means that reallocating the money doesn’t save the government money from an accounting standpoint.

Does this increase the onus on the Fed to do more?

Evercore wrote that this could tilt the Federal Open Market Committee toward taking action in its final policy-setting meeting of 2020 on December 15 and 16. The Fed had already been teeing up the possibility of leaning more heavily on its asset purchases, or quantitative easing, in that meeting.

The concern: with the lack of backstops and COVID-19 cases rising, the Fed may have to do more than originally planned.

“One side effect is that it increases the likelihood that the FOMC will strengthen QE in December, with additional duration and guidance, and if things get bad enough, a faster pace of purchases too,” Evercore wrote. “However, QE is a very imperfect substitute for a credit market backstop.”

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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