Steven Mnuchin acts to hobble the Fed

Treasury Secretary Steven Mnuchin was one of the heroes of the coronavirus crisis, working hand-in-glove with Fed chair Jay Powell to give the central bank all the ammunition it needed to fight the virus and the associated economic recession. Now, he's trying to take that ammunition away.

Why it matters: If he's successful, Mnuchin will effectively disarm the Fed, creating a lot more economic downside once President-elect Biden takes office.

How it works: Mnuchin's predecessor Hank Paulson once explained, "If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out."

• That's how a lot of monetary policy has worked in 2020: The market knew that the Fed was capable of lending hundreds of billions of dollars to non-banks, and therefore felt comfortable lending that money itself.
• The logic: If the market didn't lend money to companies, the Fed would. Either way, the borrowers would get the money they needed — which means they were safe to lend money to.

The programs worked exactly as intended, which is to say that they were barely used. Borrowers found lenders in the private sector, and the Fed backstop remained reassuringly present.

The big picture: In a crisis, the distinction between fiscal policy (Treasury) and monetary policy (the Fed) tends to blur. A lot of the Fed programs announced this spring were possible only because they were approved by the Treasury, which promised to cover any costs in the event that they ended up losing money.

• Treasury is now attempting to force those programs to expire at the end of the year, just weeks before Biden takes office. The new administration would not be able to resuscitate the facilities without new congressional authorization, which will be much harder to achieve than it was in April.

What they're saying: The Fed, which until now has taken great pains to appear on the same page as Treasury, put out a stunning statement saying it "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 bottom line: The crisis has seen Powell rise to the occasion in a very impressive manner. But he couldn't have done it without Mnuchin. Now, it seems, Mnuchin is trying to ensure that Powell won't have the same powers under Biden.