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November 20, 2020

Trump picks a fight with Powell. The economy loses

A rare fight between the policymakers tasked with guiding America's economy through the Covid-19 crisis could hit businesses at an already tense moment.

What's happening: US Treasury Secretary Steven Mnuchin has pulled the plug on emergency Federal Reserve lending programs, drawing a rare rebuke from the central bank, which said they are needed to support the economy as the coronavirus pandemic continues to rage.

In a letter sent Thursday to Fed Chairman Jerome Powell, Mnuchin asked the central bank to return some $455 billion in unused funding for programs set to expire Dec. 31. He added that Congress would then be able to use the money for other purposes.

The Fed programs "have clearly achieved their objective," Mnuchin wrote. "Markets responded positively, spreads tightened, and banks continued lending."

The central bank immediately blasted the decision. The Fed, which typically avoids commenting on sensitive political issues, responded in a statement saying that 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."

Powell said earlier this week that it was too soon to wind down the lending programs. "When the right time comes, and I don't think that time is yet or very soon, we will put those tools away," he said Tuesday.

Businesses agree. The powerful US Chamber of Commerce said in a statement that the action "closes the door on important liquidity options for businesses at a time when they need them most," adding that it "unnecessarily ties the hands of the incoming administration."

Investors are also feeling jittery. S&P 500 and Dow futures fell back slightly on Friday morning.

Big picture: Powell has made clear that the risk during the pandemic is doing too little to support a struggling economy — not doing too much. And as the coronavirus surges again in the United States, forcing states to enact a wave of new mask mandates and restrictions, the timing of the Trump administration's move is concerning.

Covid-19 cases in the United States reached another daily high Thursday with more than 185,700 new infections, according to Johns Hopkins University. More than 252,000 Americans have now died of the disease.

Meanwhile, some economic data appears to be softening, Rabobank strategist Philip Marey observed in a research note Friday. Initial claims for unemployment benefits went in the wrong direction last week, climbing to 742,000 after four weeks of declines.

"The combination of rising Covid-19 infections and lack of additional fiscal stimulus after the CARES Act [in March] may now be finding its way into the economic data," Marey said.

That's a risky moment to cut off American companies from the help some may soon need.

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