Everyone’s panicking about the stock market. Except the Fed.

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Jan 25, 2022 View in browser   By Kate Davidson Editor's Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. Federal Reserve officials begin their two-day meeting in Washington today, and we have to think they're talking about the same thing everyone else is: How about that stock market? A volatile day of trading on Wall Street ended Monday with stocks erasing steep losses after a frantic afternoon rally as investors continued to brace for the Fed to more aggressively pull back support for the economy. The S&P 500 Index briefly fell into correction territory, dropping 10 percent from its recent high, and the Dow Jones Industrials plunged more than 1,000 points in the morning, before finishing up 0.3 percent for the day. The market slide this year has been dramatic , and a bit unnerving. But for the Fed, slumping stocks, in and of themselves, are neither surprising nor unwelcome.  Officials don't ignore market drops; rather, it's part of the calculation as they think about what sort of financial conditions are necessary to achieve their policy goals. "This is what you'd be looking for when you tighten policy and when markets begin to build in tightening," former Fed vice chair Donald Kohn said of the weekslong selloff that preceded Monday's session. "And that wouldn't have bothered them at all." Monday's chaotic moves were more unusual , Kohn said, and may have prompted officials to tweak communication plans developed over the weekend or take stock of liquidity and market functioning. But nothing that's happened should back them away from the basic course they're on, which is to continue removing economic support to rein in too-high inflation, he said. "If the Fed thought that the stock market correction were systemic or created massive liquidity problems, they might incorporate it into monetary policy," said Megan Greene, a senior fellow at the Harvard Kennedy School and chief economist at Kroll. "I think investor losses at this point don't bother them in and of themselves. "If there's weaker demand, that's kind of what the Fed was trying to achieve anyhow." Here's how Fed Chair Jerome Powell described it in January 2019, after signaling the Fed would pause rate increases amid a trade war, stock market slide and slowing growth: "We don't react to … most things that happen in the financial markets. But when we see a sustained change in financial conditions, then that's something that has to play into our thinking. In fact, our policy works through changing financial conditions, so it's sort of the essence of what we do." One important caveat: The Fed isn't contending only with how markets are processing its future policy moves. Rising tensions between Ukraine and Russia have also put investors on edge. The Pentagon said Monday it is putting 8,500 U.S. troops on heightened alert for potential deployment to Europe amid growing concerns of a Russian invasion of Ukraine. In such a highly volatile situation, Powell will want to be careful "to avoid throwing gasoline on the fire," Kohn said. "The markets have built in what the Fed has told them they're going to do — that's great, it's tightened things up a little bit," he said. "I think I would be tempted to accept that and not try to move the markets one way or another and announce something surprising." "To be calm and predictable in a situation like this would be helpful." IT'S TUESDAY — Remember to send us your questions for Fed Chair Jerome Powell, and we'll publish the best ones tomorrow morning before the post-meeting press conference: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson and @aubreeeweaver.   JOIN FRIDAY TO HEAR FROM GOVERNORS ACROSS AMERICA : As we head into the third year of the pandemic, state governors are taking varying approaches to public health measures including vaccine and mask mandates. "The Fifty: America's Governors" is a series of live conversations featuring various governors on the unique challenges they face as they take the lead and command the national spotlight in historic ways. Learn what is working and what is not from the governors on the front lines, REGISTER HERE.     Driving the Day Federal Open Market Committee begins its two-day meeting … January consumer confidence index released at 10 a.m. … IS BIDEN FEELING THE INFLATION PRESSURE? — Jay Powell isn't the only one stressed by inflation woes. President Joe Biden on Monday called Fox News' Peter Doocy a "stupid son of a bitch" after he was asked whether inflation was a "political liability in the midterms" following a meeting of the White House Competition Council. From our Myah Ward: "The president, who is known for having a short temper and not the cleanest of vocabularies during heated moments, spoke right above his microphone . 'It's a great asset — more inflation,' Biden said, shaking his head. 'What a stupid son of a bitch.'" Apparently the president called Doocy about an hour later on his cellphone to "clear the air," Doocy told Sean Hannity. BIDEN MOVES TO REWRITE THE RULES ON CLIMATE THREAT — Our Victoria Guida: "The nation's top financial regulators will soon embark on a controversial, first-of-its-kind mission: forcing banks and other industry players to prepare for potential threats to the U.S. financial system from climate change. "But they're facing a maze of obstacles, including blowback from Republicans, before they've taken their first steps." "The job of bank regulators is to ensure the safety and soundness of financial institutions and promote financial stability," Rep. Andy Barr (R-Ky.), a member of the House Financial Services Committee, which oversees the agencies, said in an interview. "It is not to pick winners and losers in credit markets, politicize the allocation of capital, or solve climate change." GENSLER PLANS NEW CYBERSECURITY RULES FOR PUBLIC COMPANIES, FINANCIAL FIRMS — Our Zachary Warmbrodt: "SEC Chair Gary Gensler on Monday outlined plans for a sweeping revamp of the agency's cybersecurity rules for Wall Street firms and other publicly traded companies, as he makes a new bid to shore up breach disclosures and data privacy safeguards. HOUSE CHINA BILL WILL INCLUDE TRADE TITLE, SETTING UP CLASH WITH SENATE — Our Gavin Bade: "U.S. House legislation to confront China economically will include trade provisions that differ from the Senate's companion bill, setting the stage for a high-stakes negotiation over how to handle commerce between the world's two largest economies. House lawmakers could release their bill as soon as Tuesday, said two Capitol Hill officials with knowledge of the negotiations.." CASH AID TO POOR MOTHERS INCREASES BABIES' BRAIN ACTIVITY — NYT's Jason DeParle: "A study that provided poor mothers with cash stipends for the first year of their children's lives appears to have changed the babies' brain activity in ways associated with stronger cognitive development, a finding with potential implications for safety net policy. "The differences were modest — researchers likened them in statistical magnitude to moving to the 75th position in a line of 100 from the 81st — and it remains to be seen if changes in brain patterns will translate to higher skills, as other research offers reason to expect." BOOK CLUB: TOP BIDEN AIDE'S BOOK DEBUTS TODAY — Elisabeth Reynolds, special assistant to the president for manufacturing and development at the National Economic Council, has a new book out today , with her co-authors and former MIT colleagues, professors David Autor and David Mindell. The book, "The Work of the Future: Building Better Jobs in an Age of Intelligent Machines," explores why the U.S. lags behind other industrialized countries in sharing the benefits of innovation with workers, and how to remedy the problem. (Word on the street is that Reynolds is also a graduate of Central High School in Manchester, N.H., but this West High grad won't hold it against her.) Crypto MCHENRY: CONGRESS SHOULD SET CRYPTO RULES BEFORE REGULATORS — Our Sam Sutton: "Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, said Monday that Congress needs to accelerate work on digital asset rules as the SEC and other regulators take the lead on key policies. "'We should not cede these important issues to regulators such as [the] SEC or CFTC, or to the judicial branch, to determine,' the North Carolina Republican said in a letter to House Financial Services Chair Maxine Waters (D-Calif.)." FITCH: CRYPTO MINING POSES RISK TO PUBLIC POWER UTILITIES – The U.S's emergence as the global leader in cryptocurrency mining could lead to trouble for domestic public power utilities, according to Fitch . Mining companies require tremendous amounts of energy to power computers that validate cryptocurrency transactions in exchange for new digital assets, which makes them potentially valuable customers for utilities. Energy costs are a major determinant of their profits, however, and miners will often relocate or shut down based on the price of electricity. The ratings agency warned that utilities could guard against that uncertainty by requiring upfront payments if they're banking on the new arrivals to support new generation facilities or other infrastructure upgrades. (h/t Sam Sutton) Markets NASDAQ DAYS LIKE THIS ONE WERE COMMON. DURING THE DOT-COM CRASH — Bloomberg's Lu Wang: "Days like Monday are not unprecedented. But when they've come, it's been at times that are not remembered fondly by equity bulls. Today's move was the biggest of its kind since Jan. 8, 2001, in the middle of the come-down from the dot-com bubble. Most of the other similar moves occurred in the three years that crash took to play out, with a few others coming in the heart of the 2008 financial crisis." UNCERTAINTY IN CRYPTO – From our Sam Sutton: "While cryptocurrency markets have traditionally danced to their own rhythm, they're starting to move more in lockstep with traditional holdings like stocks. "One factor that may have influenced Bitcoin and Ether's recent collapse to their lowest prices since last summer was news of Biden's pending executive order on digital assets, according to Bitwise Asset Management CIO Matthew Hougan. 'I think the market is pricing in an extremely sort of bearish, risk-focused executive order,' he said, adding that the news created more uncertainty for an already volatile market. 'That's a milestone that the market might look towards getting past and, between now and then, volatility may be the name of the game.'"   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Jobs Report Miranda Margowsky has joined the Financial Technology Association as its first vice president of communications. She joined FTA from Precision Strategies, and worked previously on the Hill as a press secretary for House and Senate Democratic leadership members. Janet Hale has joined FTI Consulting as a senior managing director in the firm's strategic communications group. Hale previously worked on regulatory compliance at Treliant and spent 15 years as a consumer compliance executive at KeyBank. FLY AROUND — WSJ's David Harrison and Paul Hannon: "Rising infection rates driven by the faster-spreading Omicron variant of Covid-19 led to a U.S. and global economic slowdown as the year got under way, surveys of purchasing managers said." — WaPo's David Lynch: "It probably isn't much consolation for Americans struggling with the highest inflation in 40 years, but they are not alone . In the European Union, prices are rising faster than at any time since the euro currency was introduced. The annual inflation rate in the United Kingdom hit 5.4 percent in December, the highest figure there in nearly 30 years. Canada's consumer prices are rising twice as fast as before the pandemic." — WSJ's Miriam Gottfried: "Tension between Leon Black and his Apollo Global Management Inc. co-founder Josh Harris is boiling over, threatening to buffet the investment giant with fresh controversy."   Follow us on Twitter Mark McQuillian @mcqdc Kate Davidson @KateDAvidson Aubree Eliza Weaver @aubreeeweaver Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary   Follow us

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